Stocks and shares ISAs: don’t take your tax-free allowance for granted

Sixed group of millennial aged friends discuss investing

The end of the current tax year is edging nearer and nearer. If you don’t use this year’s ISA allowance by 5 April, you’ll lose it as you can’t carry it forward into the next tax year.

Importantly, the government carries the power to meddle with the tax-free allowance. So, it’s entirely possible it could be less generous in future. Let’s take a look at what this all means.


How does the ISA allowance work?

An ISA is an individual savings account. Anything you put into an ISA stays tax free year after year. So, if you put money into a stocks and shares ISA today, you won’t have to pay tax on any returns you earn now and in the future. 

Every adult in the UK has an annual tax-free limit to put into any type of ISA. For the current 2021/22 tax year, which ends on 5 April, the ISA allowance is £20,000.

The annual ISA limit doesn’t roll over. So, if you don’t use it before the end of the tax year, you lose it. In other words, if you haven’t already put £20,000 into an ISA this year, you’ve only three weeks left to do so. If you don’t, you won’t get another opportunity to use this year’s allowance.

What is the ISA allowance for 2022/23?

The ISA allowance for 2022/23 will remain at £20,000. It has been at this level since 2017/18.

Prior to 2017/18, it was often the case that the annual ISA limit rose each tax year. And with the UK’s soaring levels of inflation, ISA holders may have hoped for a more generous allowance in 2022/23.

However, to be fair to the government, the tax-free limit jumped significantly in 2014/15 when it rose from £5,760 to £15,000. When the increased limit was announced by George Osborne, the chancellor at the time, it took many by surprise.


Could the tax-free ISA limit change in future?

The government does hold the power to modify the tax-free ISA allowance at will. As a result, it is possible the annual limit will be reduced in future, possibly in time for the 2023/24 tax year.

In fact, many of those struggling with the cost of living may favour raising taxes on those with assets in stocks and shares. That’s because there’s an argument right now that workers are having to bear the brunt of post-pandemic tax rises. For example, National Insurance is increasing by 1.25% next month. National Insurance is a regressive tax in that the amount you pay drops (in percentage terms) if you earn over a set amount. 

To address criticisms about the rise unfairly targeting workers as opposed to those with existing wealth, the government also announced a share dividend tax hike. This tax will also increase by 1.25% points next month. However, it’s easy to avoid as it won’t apply to investments held within an ISA wrapper.

What are the chances of the tax-free limit changing?

If the government were to reduce the tax-free ISA allowance, it would be an unpopular move. That’s because some could argue it would reduce the incentive to save.

An even more unpopular move, however, would be for the government to take retrospective action by slashing limits from previous tax years. However, both could technically happen. As a result, it’s best not to take the current ISA allowance for granted. In other words, if you’re thinking of opening an ISA, it may be better to act now, before the current tax year ends.

Have you used your ISA allowance for 2021/22? If not, take a look at The Motley Fool’s top-rated stocks and shares ISAs to make the allowance work for you.

Please note that tax treatment depends on your individual circumstances and may be subject to change in the future. The content in this article is provided for information purposes only. It is not intended to be, nor does it constitute, any form of tax advice. Readers are responsible for carrying out their own due diligence and for obtaining professional advice before making any investment decisions.

The post Stocks and shares ISAs: don’t take your tax-free allowance for granted appeared first on The Motley Fool UK.

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