Four reasons to consider using your ISA allowance

What you’ll learn:

• How you can withdraw money from your ISA without it affecting your annual allowance
• Why you don't need a large lump sum to invest in an ISA
• How to transfer an ISA.

Here we look at four main reasons why you should consider using, rather than losing, your allowance. Bear in mind that tax rules can and do change and their impact on you will depend on your individual circumstances, which can also change. Also, remember that investments in ISAs can fall in value, just like any others. You may get back less than you invest.

Find out more about our Investment (Stocks and Shares) ISA¹

1. You can shelter returns from tax

No income tax or CGT. While this might not be the exact opening line to the ‘Only Fool’s and Horses’ theme song, the words could easily be applied to the potential appeal of an ISA to help you shelter returns from tax, something Del Boy would surely approve of. This is because within a tax-efficient investment ISA, subject to conditions being met, any profits from the buying and selling of investments incur no UK income tax or capital gains tax (CGT).

This freedom from CGT could provide a much-needed tax break for investors whose capital gains take them above the 2024-25 tax year’s annual CGT allowance of £3,000.

You also don’t pay tax on dividends from shares held in an ISA. Outside an ISA, all taxpayers currently have an annual tax-free dividend allowance of £500 but anything above that is liable to tax. Basic-rate taxpayers must pay 8.75% on any dividends above the £500 allowance. Higher-rate taxpayers pay 33.75% and additional-rate taxpayers pay 39.35%².

So, if you receive more than £500 in dividend income, or may do in the future, investing in an ISA means you won’t be taxed on it.

If you have any savings income outside an ISA, there is a personal savings allowance (PSA) which enables basic-rate taxpayers to earn up to £1,000 interest a year tax-free, or £500 for higher-rate taxpayers. Additional rate taxpayers aren’t entitled to this allowance. You’ll pay income tax on any interest you receive above these amounts, unless your money is in an ISA. This savings income covers several different kinds of investment income.

You may decide that you won’t benefit from an ISA because the other tax allowances available for cash savings and investments are more than enough based on your circumstances. However, if you plan to continue building the amount of money you have in savings and investments, ISAs can help protect your assets from tax over the long-term.

2. ISAs are more flexible than ever

ISAs have become much more flexible in recent years. You can withdraw and then replace cash, in the same tax year without it affecting your annual allowance, currently £20,000. Remember that not all ISA providers offer this flexibility, or may offer it only on some of their products, so check with your provider before you withdraw any money.

The ISA flexibility rules do not apply to Lifetime ISAs or the Help to Buy ISAs. If you make a withdrawal from a Lifetime ISA in future tax years, you'll face a 25% charge levied against your withdrawal amount, except where you are aged over 60 or where you use the withdrawal to buy your first property. (Please note, Barclays doesn’t offer Lifetime ISAs and Help to Buy ISAs were withdrawn from the market in 2019. If you’d like more information on either product by visiting www.gov.uk/lifetime-isa)

3. You don’t need a large sum to invest

Worried you can’t afford to use an ISA? The reality is that you don’t need thousands of pounds to open one. Although the total amount that can be paid into ISAs is £20,000 in the 2024-25 tax year, you don’t need to have this much available to take advantage of ISA benefits.

If you did pay in the full allowance every year, however, you could potentially grow a savings pot worth hundreds of thousands of pounds over time – there’s no limit to how much the value of your investment ISA can grow. However, you need to appreciate that the value of your investments can fall as well as rise and you may get back less than you initially invested.

4. You can transfer your ISA

You can transfer ISAs – maybe you want to switch provider, have found a better cash ISA rate or want to move from cash into investments or vice versa. However, before you do, consider carefully if it’s the right option given your circumstances and make sure you understand the rules³.

If you’re transferring money you’ve saved or invested into your ISA, you can choose whether to transfer the full amount or just a partial transfer. For example, you may have money in a cash ISA and want to invest some, but not all of it. Find out more about the risks and drawbacks of transferring your investments.

And before transferring your ISA, find out about any charges, exit penalties, or benefits you may lose.

Please bear in mind that this article is for general information purposes only and Barclays Smart Investor does not provide personal investment advice. If you’re unsure, seek professional financial advice.