End of tax year: How opening an ISA now could save you from a future tax bill

In just over two weeks a new tax year will be upon us. From 6 April, every adult living in the UK will get a brand new £20,000 tax-free annual ISA allowance.

So, what does this all mean? And how could opening a new ISA — or maxing your allowance for the current tax year — BEFORE April 6 save you from a future tax bill? NimbleFins explains all you need to know...

What is the ISA allowance?

The annual ISA allowance refers to the tax-free amount you can put into any type of ISA in any given tax year.

Any interest you earn from cash held in an ISA stays tax-free, not just for the current tax year, but for subsequent tax years too. However, this only applies if you don't access your money.

For the current 2022/23 year, the ISA annual allowance is £20,000. It's been at this level since 2017/18, after it raised from £15,240.

Importantly the ISA allowance can be split between different types of ISAs. This means it's possible to put say, £12,000 into a cash ISA, and £8,000 into stocks and shares ISA within the same tax year. See our article for more on the differences between a Cash ISA and a Stocks and Shares ISA.

What are the benefits of opening an ISA before 6 April?

Every year the annual ISA allowance refreshes. This means that from 6 April 2023, every adult in the UK is able to stash another £20,000 into an ISA. However, while everyone gets a fresh tax-free allowance from this date, any part of the allowance you don't use during the current tax year disappears, forever!

This is why it's really important to think carefully about using up your allowance before the end of the current tax year. If you don't use it, then you lose it.

For example, say you have £25,000 saved in a normal savings account. If you don't put at least £5,000 into an ISA during the current tax year, then it won't be possible to cover the full £25,000 in a tax-free wrapper until April 2024.

I've less than £20,000... does this really apply to me?

If you've less than £25,000, you may not think it's a big deal if you don't make the most of your allowance before April 6. However, three are big reasons why it could be worth getting your skates on. Let's take a closer look...

1. Your savings may grow next year. If you've a decent sum of savings and you continue adding to it next year, there's a chance your pot will pass the £20,000 threshold. If this does happen to you during the 2023/24 tax year, and you didn't max your 2023/23 ISA allowance, then you may live to regret it.

And even if your savings pot is currently a lot less than £20,000, don't assume that this will always be the case. For example, next year you could bag yourself a promotion at work, or receive an unexpected family windfall.

2. The ISA allowance may be less generous in future. The Government raised the annual ISA allowance to £20,000 back in 2017 to encourage individuals to save for a rainy day. Yet the economic environment has changed a lot since then. Government borrowing is at its highest since World War 2, inflation is continuing to rise, and there are real fears the UK is on the brink of a recession.

Because of the state of the UK's finances, there's every chance the Government will look for imaginative ways to plug its borrowing deficit. We've already seen income tax thresholds frozen of course, while those in the public sector have had to swallow real-terms pay cuts. Next in line could be those with savings, particularly ISA savers.

While the Government hasn't indicated it will increase the tax burden on savers tomorrow, it could be argued that slashing the current ISA allowance could be the easiest way to go about it. If this does happen, then it shouldn't impact those who've maxed out previous years' ISA allowances. This is another reason why savers shouldn't take the current ISA allowance for granted, and make the most of the current allowances while they still can.

3. Savings rates could continue rising. Under the Personal Savings Allowance (PSA), basic-rate taxpayers can earn £1,000 a year savings interest a year in a normal savings account without having to pay tax on any earned interest. For higher-rate taxpayers, the limit is £500. (Additional-rate payers don't get an allowance).

In years gone by, the PSA seemed massively generous given that typical easy-access savings rates were barely paying half a percent. Yet the savings environment has been turned on its head over the past year or so, thanks to higher interest rates. It's now easy to bag more than 3% AER from an easy-access account, meaning that £34,000 saved in a 3%-ish account would be enough for a a basic-rate taxpayer to hit their PSA limit. For higher-rate taxpayers, the savings needed would be just £17,000.

Because of these higher savings rates, ISAs are back in the limelight. And, of course, should interest rates continue rising, putting a tax-free wrapper around your savings could become even more attractive in the near future. This is another reason why current savers should consider opening an ISA, or maxing their existing allowance within the current tax year.

What Cash ISA accounts are available right now?

If you're interested in opening an easy-access cash ISA it's possible to earn 3.2% AER variable though Cynergy Bank. The minimum deposit required to open this account is just £1.

If that's not for you, then the next-highest rate is offered by Shawbrook Bank, which pays 3.17% AER variable easy-access. You can open this account with £1,000.

While these rates are a tad lower than the top savings account — which is currently 3.4% AER variable — the tax advantages of opening an ISA could be worth it.

Also, don't forget that you can also lock money away in an ISA if you're looking for higher returns. The highest one-year fix pays 4.1% AER fixed via Charter Savings Bank (min £5,000). Meanwhile. the highest three-year fix pays 4.2% AER, through Close Brothers (min £10,000).

While we've covered reasons why savers should consider using up their ISA allowance before April 6, it should be noted that contributing to an ISA should be a personal decision. Always do your own research before deciding on which account is best for you.

Disclaimer: ISA Tax treatment depends on your individual circumstances and may be subject to change in the future. This article does not constitute any form of tax advice. Readers are responsible for carrying out their own due diligence and for obtaining professional advice before making any investment decisions.