When you’ve used your ISA allowance

With the individual savings account (ISA) allowance now at £20,000, it’s difficult for many people to save more than that amount each year. 

However, where unexpected or additional money becomes available, you may need to consider investing into funds or other investments directly. ISAs are tax-privileged wrappers. Outside them there are potential tax charges, although for many investors they are not punitive. The two main taxes are:

• Income tax – the first £5,000 of dividends in the current tax year are covered by a dividend allowance which is taxed at a nil rate. The excess is taxable at 7.5% for a basic rate tax payer (or 32.5% and 38.1% respectively for higher and additional rate taxpayers). From 6 April 2018 the dividend allowance is due to fall to £2,000.

  Investors may qualify for the personal savings allowance of £1,000 (£500 for higher rate taxpayers) and possibly even the 0% starting rate of tax of up to £5,000.

• Capital gains tax (CGT) – you have an annual CGT exempt amount of £11,300, which means that you only pay tax (at 10% for basic rate or 20% if a higher rate taxpayer) on gains in excess of that threshold. Gains on property are still taxed at 18% for basic rate and 28% for high rate taxpayers.

Many investors use their annual ISA allowance by selling the investments they hold directly and reinvesting them into their ISAs, realising gains which may be fully or partially within the annual CGT exempt amount.

So rebalancing your portfolio annually and keeping an eye on your ISA investment levels should help manage your investments efficiently. 

The value of tax reliefs depends on your individual circumstances. The Financial Conduct Authority does not regulate tax advice, and tax laws can change. The value of your investment can go down as well as up and you may not get back the full amount you invested. Past performance is not a reliable indicator of future performance. Investing in shares should be regarded as a long term investment and should fit with your overall attitude to risk and financial circumstances.