ISA Allowance: Making the Most of Your £20,000
Your ISA allowance resets every April 6th—and unused allowance is lost forever. Here's how to make the most of this valuable tax shelter.
The £20,000 Opportunity
Each tax year, every UK adult can put up to £20,000 into ISAs. Returns on that money—interest, dividends, and capital gains—are completely tax-free. Forever.
Unlike pensions, there's no tax relief on contributions. But unlike pensions, there's no tax on the way out either. And no restrictions on when you can access it.
The Power of Tax-Free Growth
£20,000 per year for 20 years at 5% growth:
- Total contributed: £400,000
- Value after 20 years: ~£700,000
- Tax on the £300,000 gain: £0
Types of ISA
Your £20,000 can be split across different ISA types:
Cash ISA
- Tax-free savings interest
- No investment risk
- Low returns historically
- Good for emergency funds
Stocks & Shares ISA
- Tax-free dividends
- Tax-free capital gains
- Investment risk
- Best for long-term growth
There's also the Lifetime ISA (£4,000 limit, 25% bonus, for first home or retirement at 60) and Innovative Finance ISA (peer-to-peer lending—higher risk).
Cash ISA vs Personal Savings Allowance
Since 2016, most people have a Personal Savings Allowance (PSA):
- Basic rate: £1,000 of savings interest tax-free
- Higher rate: £500 of savings interest tax-free
- Additional rate: £0 PSA
If your savings interest is below your PSA, a Cash ISA adds no immediate tax benefit. But it does protect against future rate rises or if your income increases.
The case for Stocks & Shares: For long-term savers, the dividend and capital gains tax savings from a Stocks & Shares ISA typically far exceed the interest savings from a Cash ISA. The dividend allowance has fallen to just £500, making ISA shelter increasingly valuable.
ISA Strategies
The "Bed and ISA" Manoeuvre
Already have investments outside an ISA? Consider selling them and rebuying within your ISA:
- Sell investments in your general account (using your £3,000 CGT allowance)
- Transfer the cash to your Stocks & Shares ISA
- Rebuy the same (or similar) investments
Now those investments grow tax-free forever. The key is staying within your CGT allowance to avoid triggering a tax bill on the sale.
Using Your Full Allowance
If you can't invest £20,000 in one go, set up regular monthly contributions. Even £100/month uses £1,200 of your allowance—better than nothing.
Couples Strategy
Each person has their own £20,000 allowance. A couple can shelter £40,000 per year between them. If one partner has more investable assets, consider gifts to the lower-asset partner to use their allowance (no tax on gifts between spouses).
Flexible ISAs
Many Cash ISAs and some Stocks & Shares ISAs are now "flexible." This means if you withdraw money, you can replace it in the same tax year without it counting against your allowance.
Example: You have a £20,000 ISA and withdraw £5,000. With a flexible ISA, you can put back that £5,000 plus contribute a fresh £20,000—total £25,000 in the same tax year.
Check if your ISA is flexible before assuming this works.
ISA in Retirement
ISAs become particularly valuable in retirement:
- Withdrawals don't affect your tax bracket
- Withdrawals don't affect benefits calculations
- Flexibility to take large amounts without tax consequences
- Useful for managing income alongside State Pension and workplace pension
Many retirees use ISAs to supplement pension income without pushing into higher tax bands.
How Talk Through Wealth Helps
Optimise your ISA strategy:
- Project tax-free growth over your investment horizon
- Compare ISA vs pension contributions
- Model Bed and ISA strategies
- Plan ISA withdrawals in retirement
- Coordinate with spouse's allowances