Jasmine Birtles
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3 reasons why you shouldn’t wait to open a stocks and shares ISA
Reading Time: 6 minutesStash your investments in a stock and shares ISA and you won’t have to pay dividends, capital gains or income tax on any returns. This is why ISAs are often the first port of call for newbie investors.
Yet the ISA tax-free wrapper is something that shouldn’t be taken for granted. Thanks to the cost of living crisis, the government is looking anywhere it can to raise money to plug the hole in the nation’s finances. Just this year we’ve seen the tax man crackdown on eBay sellers.
Sadly, it seems as though investors haven’t been able to escape the government’s hunger for capital either. Cuts to tax-free investment allowances were introduced for the current 2023/24 tax year. And while no changes to the ISA allowance were announced, there’s every chance the existing £20,000 limit could be chopped in future, especially if we get a change of government at the next general election.
In this article we’re going to explain why it’s probably better to act sooner rather than later if you’re looking to open a stocks and shares ISA. Plus, we’ve tips on how you can find the right type of ISA for you.
Keep on reading for all of the details or click on a link to head straight to a section.
- An overview of stocks and shares ISAs
- The annual ISA allowance
- Why you shouldn’t wait to open an ISA
- How to find the best ISA for you
Overview of stocks and shares ISAs
A stocks and shares ISA is a tax-efficient investing account.
Any investments you hold in an ISA stay tax-free year after year. This means you don’t have to pay a dividend, capital gains or income tax on any gains from investments you hold in one.
It’s up to you what investments you hold within an ISA. Funds, shares, bonds or a mixture of all three – the choice is yours.
A stocks and shares ISA shouldn’t be confused with a cash ISA. A cash ISA is simply a tax-free savings (not investing) account. Rates on cash ISAs have been pretty dire for years, though there’s been an improvement recently. That said, if you really want to grow your wealth, stocks and shares are probably better over the long-term.
It’s worth knowing you’re allowed to contribute to a cash ISA and a stocks and shares ISA in the same tax year. However, you do have to stick to the annual ISA allowance, which applies to all types of ISA.
The annual ISA allowance
Every UK adult is able to put in £20,000 into any type of ISA. In other words, between April 6, 2023, and April 5, 2024, you can stash the full £20,000 into a stocks and shares ISA. Or, if you wish, you can divide this between a cash ISA and a stocks and shares ISA.
You don’t need to use all of your ISA allowance. However, if you don’t use it in a given tax year then you can’t ever get it back. It’s very much a case of ‘use it or lose it’.
As mentioned above, the annual ISA allowance for the current 2023/24 tax year is £20,000. It’s been at this level since 2017 after it was raised from £15,240.
While you may think £20,00 is a rather generous tax-free allowance, it’s worth bearing in mind that the ISA limit hasn’t increased with inflation over the past half decade or so. This essentially means the £20,000 allowance in 2017 was far more generous, in real terms, than it is today.
Why you shouldn’t wait to open a stocks and shares ISA
If you’re looking to open a stocks and shares ISA, here are three reasons why you shouldn’t rest on your laurels.
1. Upcoming cuts to capital gains & dividend allowances
On April 6, 2023, the capital gains and dividends tax allowances were cut back. For the 2024/25 tax year – which is now less than three months away – further cuts will be introduced. Here’s the details:
- Capital Gains Tax allowance was reduced to £6,000 (from £12,300) for the 2023/24 tax year. For 2024/25 it’ll be just £3,000.
- Dividends tax-free allowance was cut to £1,000 (from £2,000) for 2023/24. For 2024/25, it’ll be slashed to just £500.
Capital gains tax (CGT) only applies to assets that you sell. So if you don’t sell, you won’t have to pay the tax. However, if you have wealth outside of a tax-free wrapper, you’ll probably want to release some of it in future. This is why the upcoming changes to the CGT allowance for 2024/25 is something worth paying attention to.
For the dividends tax-free allowance, the halving of it to just £1,000 for 2023/24 will have impacted non-ISA investors who have wealth tied up in high dividend yield stocks.
While its too late to do anything about the changes introduced for 2023/24, further cuts to existing tax allowances are coming for 2024/25. If you’re worried about the upcoming changes, opening an ISA today could be a wise decision. The more investments that you hold within a tax-free wrapper, the less chance you’ll be hammered by the upcoming changes. It really is as simple as that.
2.The ISA Allowance could be next in line for the chop
We know allowances for CGT and dividends were cut last year, and will be slashed even further for 2024/25. However, there are no planned changes to the ISA allowance. As such, the ISA allowance is likely to remain at £20,000 for the 2024/25 tax year.
Despite this, the government reserves the right to amend the ISA allowance if it wishes. It could even scrap it altogether if it chooses, and would probably rise a few bob if it did!
While a cut to the allowance is unlikely for 2024/25, there’s a chance the government will chop it in future. This means if you don’t use your full ISA allowance this tax year, you may live to regret the decision.
There are political aspects at play here too. For example, the Resolution Foundation – a popular left-leaning lobby group – has called for a cap on the amount anyone can ever hold in an ISA. The group says the current incentives are not “fit for purpose” and suggests the maximum sum anyone should ever be able to hold in an ISA should be £100,000.
Whatever your thoughts on this proposal, it’s worth taking into account that not everyone is happy with the current generosity of ISAs. As a result, future changes to the ISA allowance, or the maximum amount you can hold in an ISA, shouldn’t be ruled out – especially if there’s a change of government.
This is another reason why it’s probably best to open an ISA now rather than wait. Even if changes do come into play, they may not apply retrospectively.
3. Opening an ISA now gives you more time to research
Given you lose your annual ISA allowance if you don’t use it, there’s often a mad rush at the end of the tax year. This is because investors often clamour to open stocks and shares ISAs before the deadline.
Yet this probably isn’t the best strategy.
When it comes to investing, it pays to do your own research in order to fully appreciate what you’re investing in, and whether it’s the right fit for your investing goals.
So, given we’re a long way away from the next tax year, if you still haven’t used our annual allowance, you’ve plenty of time to do your research!
How to find the best stocks and shares ISA
If you want to open a stocks and shares ISA but don’t know where to start, it’s worth taking a look at our comprehensive guide that explains how to pick the best stocks and shares ISAs.
If you’re a first-time buyer, then you may also wish to consider opening a Lifetime ISA which gives a 25% bonus on anything you have saved towards your first property.
To learn more about investing in general, and how you can build your wealth over time, you may wish to sign up for our fortnightly MoneyMagpie Investing Newsletter. It’s free and you can unsubscribe at any time.
Warning: ISA tax treatment may change in future
The government may change the tax treatment of ISAs in future. This is a very important risk to be aware of, as there’s no stonewall guarantee that investments held within an ISA wrapper will be tax-free forever.
Disclaimer: MoneyMagpie is not a licensed financial advisor. Information found here including opinions, commentary, suggestions or strategies are for informational, entertainment or educational purposes only. This should not be considered as financial advice. Anyone thinking of investing should conduct their own due diligence. Capital at risk.
*This is not financial or investment advice. Remember to do your own research and speak to a professional advisor before parting with any money.
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