Tax-Year Deadlines Arrive With Key Tax Allowances Set To Halve

Today - 5 April - is the last day of the 2022/23 tax year. But there is still time to act to protect your finances before the government halves important tax-free investment allowances.

The new 2023/24 tax year begins on 6 April 2023, a date that will see dividend and capital gains tax (CGT) allowances slashed from £2,000 to £1,000 and from £12,000 to £6,000 respectively.

On 6 April 2024, these levels will be reduced further to £500 and £3,000, again respectively.

One way for investors to shield their investments from both dividend and capital gains tax is to hold their assets via an individual savings account (ISA). Many ISA providers are enabling customers to open ISA accounts until later this evening.

According to a Freedom of Information request made by investment platform AJ Bell, HM Revenue & Customs estimates that 1.8 million more people will be caught in the dividend tax net over the next two years as a result of these changes.

At the same time, the firm expects an extra 260,000 individuals and trusts to be liable for CGT for the first time over the next two years.

Stocks and shares ISAs are aimed at investors looking for exposure to the stock market - either by holding shares in individual companies, or by buying pooled investment vehicles such as funds or investment companies.

Read more here about our pick of the best stocks and shares ISA providers.

In contrast, cash ISAs are a type of savings account that are also shielded from tax. They come in a wide variety of formats, including, easy-access, fixed-rate, and variable-rate. Offers from providers usually last between one and five years.

You can find out more here about cash ISAs.

According to Moneyfacts, savers looking for a combination of flexible cash withdrawals, reasonable interest rates and the tax-free wrapper of an ISA are now faced with the best options since the financial crisis of 2008.

The average easy-access and notice rates rose in February, with the former now standing at 2.02% - their highest level in 14 years. Meanwhile, notice rates stood at 2.96%, again their highest level in 14 years.

The figures have leapt upwards in two years when the average easy-access ISA rate stood at just 0.23%.

Moneyfacts said the top easy-access cash ISA accounts are available from Cynergy Bank, Paragon Bank, and Teachers Building Society, which all pay 3.2%, based on a lump sum investment of the full £20,000 allowance.

Rates tend to become increasingly eye-catching and competitive in the countdown to the end of the tax year as providers encourage savers to squirrel away as much as they can in tax-friendly products.

Whether you're a would-be investor or saver, now is the time to make use of the current tax year's ISA allowance for 2022/23.

For example, the trading platform interactive investor has announced the following ISA deadlines for its customers:

* A Junior ISA is a tax-efficient investment account aimed at children under the age of 18. Find out more about JISAs here.

** Bed & ISA is a process involving a pair of deals aimed at improving tax-efficiency. It takes place when an investor with holdings outside an ISA - in a general investing account, for example - sells those investments and then subsequently buys them back so that they are held within the tax-friendly confines of an ISA.

Under the current rules, it's possible to open a cash ISA from the age of 16, while would-be investors have to wait until they reach 18 before being allowed to take out a stocks and shares version.

There is an annual ISA allowance of £20,000. For example, a 21-year-old with the necessary assets could open a £10,000 cash ISA and a £10,000 stocks and shares version in the same tax year.

Rachel Springall, finance expert at Moneyfacts, said: "As a new tax year looms it is encouraging to see interest rates have improved across cash ISAs for those savers who still need to utilise their ISA allowance."

"The savings market overall is going through a buoyant period thanks to a mix of rate competition, base rate rises and the rush of launching enticing offers for savers looking for a deal before the 2023/2024 tax year begins."

According to the investing platform InvestEngine, around 27 million UK adults own an ISA but only about a third (35%) were able to pay in their full allowance during the last tax year.

Andrew Prosser, head of investments at InvestEngine, said: "ISAs are a fantastic way for people across the UK to save or invest tax-free, but our research highlights the fact that many are missing out on the full benefits of their allowance limit. By keeping cash at home or in current accounts paying little or no interest, people are leaving their savings at the mercy of inflation."

"In light of rising interest rates, now is the perfect time for savers and investors to top up their ISAs with what they can ahead of the deadline on 5 April."

Sarah Coles, head of personal finance at investing platform Hargreaves Lansdown, says: "Securing the ISA allowance is a very sensible idea, but if you plan to leave it all in cash for a considerable period, it makes sense to consider a cash ISA.

"We've had a much more competitive ISA season than we've had for some time, so you can secure a better return on your cash, and then transfer into a stocks and shares ISA when the time is right."

Turning to investing, Ms Coles says that trying to time the market is notoriously difficult, even for professional investors: "Even when you're not trying to do anything particularly clever in terms of timing, you may want to avoid the risk of investing your annual allowance at a bad time".

"One useful option is to put money into cash within a stocks and shares ISA before the deadline, to protect your allowance, and then gradually drip-feed the money into investments."

Ms Coles says budding investors must, at all costs, avoid panicking and picking their investments in a hurry: "If you're opening an ISA at five minutes to midnight, it's not necessarily the ideal time to be thinking clearly about your investment strategy.

"It's really helpful to split the decision to open an ISA to protect your allowance, and the choice of where to invest. Before the deadline expires, you can put money into a stocks and shares ISA as cash and move into your chosen investments when you're ready."

Paul Clifton, director, wealth planning, at Arbuthnot Latham, said: "It can be confusing staying on top of all the changes each tax year. More complex still is ensuring you are making the most of your allowances."

"While planning your finances is a long-term strategy, you need regular reviews, which we recommend yearly, to make sure your strategy aligns with your long-term and short-term goals and requirements."