Maximise your ISA to stay ahead of inflation

Views & insights

Soaring inflation could mean maximising your ISA allowance before the tax year-end is more important than ever. Here’s why.


3 February 2022 | 4 minute read

Soaring inflation could mean that maximising this year’s ISA allowance is more important than ever, but only if you choose the ISA that gives your savings the opportunity for long-term growth.

Data from HMRC shows many Brits continue to favour cash ISAs over Investment ISAs, despite the potential for inflation to erode the real value of cash savings. The latest available figures reveal that in the 2019/20 tax year1, nearly £50bn was paid into cash ISAs – almost double the £24bn that was paid into Investment (stocks and shares) ISAs.

With UK inflation at a 30-year high and the 5 April tax year-end fast approaching, read on to discover why an Investment ISA could make a real difference to your long-term financial security.

Will cash deliver what you need?

You’ve probably seen the impact of rising prices on your shopping bills, and it could even have affected how much you’re able to save each month. But what you may not have considered is how those price rises are impacting the money you’ve already saved. Inflation – which is essentially a measure of how much prices go up by – reduces the purchasing power of your money and therefore eats into its ‘real’ value over time.

Figures from the Bank of England show annual inflation averaged 3.6% over the last 40 years2. Unless your savings have been growing at or above this rate, their real value will have declined. While cash ISAs and other savings products are useful for short-term goals, their interest rates tend to be very low. For example, the highest rate on an easy-access cash ISA is just under 0.7%, and the top rate on a five-year fixed cash ISA is around 1.7%3. If you’re looking for long-term growth, a cash ISA is unlikely to deliver what you need.

The power of investing

If you have enough cash set aside for emergencies and are able to take on more risk, an Investment ISA could give your money the opportunity to grow over the long term.

Let’s imagine you’re able to invest your full £20,000 ISA allowance every year for ten years. You could build up a pot worth just over £260,000, assuming investment growth of 5% a year after fees and before inflation. Over 20 years, the same investment could grow to £690,000, thanks to the power of investment growth and compounded returns.

These examples are illustrative only, as the stock market goes down as well as up. However, history shows that over periods of ten or more years it performs more strongly than cash and above the rate of inflation.

Why tax-efficient ISAs matter

If you invest through an ISA, investment gains are exempt from capital gains tax (CGT), which means even more of your money will go towards your future. For investments outside an ISA, gains above the £12,300 annual CGT exemption will be subject to tax of up to 20%. It’s sometimes possible to reduce CGT by offsetting losses against gains, but this can be complicated. It is far simpler to hold investments in an ISA where there is no risk of CGT being charged.

ISAs also shield your money from income tax. This makes them especially advantageous for higher or additional-rate taxpayers, and for those whose investments generate a very high level of income.

Finally, you don’t pay tax on dividends from investments held inside an ISA. If you receive dividend income outside an ISA, you’ll pay tax on dividends that exceed your £2,000 annual dividend allowance. The rate of dividend tax is set to increase by 1.25 percentage points from 6 April 2022, which could make ISAs an even more important tax planning tool.

Act now before it’s too late

It’s easy to put off decisions about money, but when it comes to ISAs it is a case of act now before it’s too late. ISAs have a ‘use it or lose it’ allowance, so if you don’t use your full £20,000 allowance by 5 April, it is gone for good. With inflation showing no signs of abating any time soon, maximising your allowance through an Investment ISA could prove more important than ever.

Next steps

In uncertain times, some smart advice could help you make better decisions. We can help you invest your money in a way that suits your individual needs, while ensuring you’re taking advantage of all your tax allowances and exemptions. You can rest assured your savings are working as hard as they should be, and that you’re on track for a secure financial future.

1 HMRC ISA tables, published June 2021
2 Bank of England inflation calculator
3 – data extracted 4 January 2022

The value of investments, and any income from them, can fall and you may get back less than you invested. Tax treatment depends on the individual circumstances of each client and may be subject to change in the future. Neither simulated nor actual past performance are reliable indicators of future performance. Information is provided only as an example and is not a recommendation to pursue a particular strategy. Information contained in this document is believed to be reliable and accurate, but without further investigation cannot be warranted as to accuracy or completeness.

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