Improved terms, together with the erosion of tax allowances elsewhere, are making ISAs a favourable option for the new tax year.

Since their launch, successive Chancellors have made revisions to Individual Savings Accounts (ISAs). Before his Budget proposal of an extra £5,000 for a new ‘UK ISA’, the current Chancellor made arguably his biggest hitting pro-ISA changes in the Autumn Statement 2022:

• Halving the dividend allowance to £1,000 for 2023/24 and again to £500 for 2024/25.
• The capital gains tax (CGT) annual exempt amount was cut from £12,300 to £6,000 for 2023/24, then to £3,000 for 2024/25.
• Almost £25,000 was cut from the additional rate threshold leaving many more taxpayers with a zero personal savings allowance (PSA) from 2023/24.

The dramatic reductions in the dividend allowance and the CGT annual exempt amount alone mean that you could be paying up to £2,450 more tax on the returns from your investments in 2024/25 than 2022/23. Even a basic rate taxpayer could be over £1,050 worse off. ISAs offer a way to sidestep these tax increases. A reminder:

• Dividend income within an ISA is free of UK income tax, although withholding tax may apply to foreign dividends.
• Interest from deposits or fixed interest securities is also free of UK income tax.
• Gains on investments held within ISAs are free of CGT.
• There is nothing to report regarding ISAs on your tax return.

As we move into a new tax year, now is the time to consider your ISA contributions for 2024/25 and review the investment holdings in existing ISAs to maximise those potential tax savings.