10 ways to manage your ISA allowance at tax year-end

We all have a generous annual allowance for ISAs, but time to make the most of this tax benefit is running out. Even if you're not investing the full amount, Faith Glasgow has some great ideas about what every investor should be doing at this time of year.

The end of the tax year is approaching, and with it a slew of reminders to “use your £20,000 ISA allowance or lose it”. In normal times it’s good advice, given the long-term protection against tax that an ISA wrapper provides as your investments grow.

But, as Jeff Prestridge argues in his recent column for interactive investor, current events including painful inflation and war in Ukraine are hardly encouraging us to plough large lump sums into the stock market at present.

Nonetheless, the run-up to tax year end is a good time to prune and streamline your investments, and it’s also possible to put aside cash, if you have some spare, for a later date.

Here are 10 ideas to ensure your portfolio is in decent shape for the new tax year.

1. Consolidate your ISAs in one place

You may have stocks and shares ISA accounts from previous years scattered across a number of providers; perhaps you’re also tempted to move money from an existing cash ISA into the stock market, to drip-feed in.

Whatever your situation, there are real advantages to bringing your ISAs together, in terms of management and investment decisions, as it becomes much easier to get a meaningful overview of your investments when they’re all in one place. That means you can then weed out duplicate or overlapping funds and get a clearer idea of your allocations to different assets.

You’ll also cut down on paperwork. And you may be able to reduce the amount you pay for the ISA wrapper and trading charges.

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2. Consider transferring to reduce platform fees

Even if you keep all your ISA holdings with a single ISA provider, it may be the case that you’re paying significantly more than you need to over the long term.

Many brokers charge a percentage fee, in some cases capped at a certain amount. They tend to be the cheapest option for small portfolios; but flat-fee based ISAs such as that offered by interactive investor (costing £9.99 a month) become increasingly economical as your portfolio grows, because they don’t rise in tandem with it.

To put that into perspective, for a £300,000 portfolio, you’ll pay £183.80 per year plus trading fees for an ii ISA, compared with £975 for an account from Charles Stanley or Fidelity and £1,250 for an ISA from Hargreaves Lansdown, according to Boring Money’s ISA finder.

3. Do 'bed & ISA' with taxable investments

Perhaps you really don’t want to commit any money to the stock market in the face of soaring inflation. But if you have taxable investments sitting outside your ISA - perhaps shares from an employer’s Save As You Earn savings scheme, a demutualised building society or an inheritance – this is a good opportunity to use your £20,000 allowance to bring them inside the tax-free wrapper.

‘Bed & ISA’ refers to a process that involves selling a holding and buying it back at the same time within the ISA wrapper. Platforms such as ii may offer a service to keep things simple for customers. You’ll probably find you end up with slightly fewer shares after the exercise, because there is a cost for trading and shares or investment trusts will also pay 0.5% stamp duty.

There may be a capital gains tax liability if profit on the sale of the investment exceeds your annual CGT allowance - £12,300 in 2021/22. In that case you might decide just to transfer part of the holding in order to keep your gains below the tax threshold. However, once the bed & ISA is complete, any dividends and further gains are free of tax.

4. Pay in cash now and invest it later

One useful feature of stocks and shares ISAs is that you can pay in cash up to the annual allowance, but there’s no obligation to invest it straightaway. That’s particularly pertinent for many investors when markets are highly volatile and the outlook is uncertain, as has been the case in 2022.

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So if you’re lucky enough to have a chunk of cash sitting idle as April approaches, you could put it into your ISA and then drip feed it into your chosen investments over the coming months.

5. Use a lump sum to bag a long-term bargain

The contrarian argument is that periods of volatility are a terrific time for long-term investors to pick up bargains. That can work well if you’re an investment trust fan, as you can use measures such as the trust’s current discount relative to its 52-week high, low and average to assess how cheap it is.

As an example, on 25 February shares in the highly regarded Monks investment trust were trading on a -8.6% discount to net asset value (NAV), the widest it had been in the previous 52 weeks. Over that time, the share typically traded at around NAV, with a high of 5.7%.

Investors building an ISA nest-egg for future decades might see this as a good opportunity to pick up quality at an attractive price - but it’s not a strategy for anyone with short-term horizons.

6. Use your allowance to diversify

If you are able to put money into your ISA this year, it’s a good idea to make sure that your portfolio is properly diversified. Given current uncertainties in the market, this could be the time to consider underpinning an equity-heavy growth or income portfolio with an investment trust focused on alternative assets such as property, renewables and infrastructure, or a gold exchange-trade fund (ETF) as a safe haven holding.

You could also consider broadly diversified holdings designed and run primarily to protect the value of your capital while providing some growth. The multi-asset flexible investment sector includes broad-based defensive choices such as the Troy Trojan open-ended fund, and Capital Gearing, Ruffer and Personal Assets among investment trusts.

7. Contribute to a Junior ISA

When the investment climate is difficult, as it certainly is in early 2022, you might well feel reluctant to commit money to investments that you may want to dip into within the next 10 years or so. However, as well as your own £20,000 allowance, if your young child or grandchild has a Junior ISA in their name, you can put up to £9,000 into that this tax year; when they reach 18 it will automatically roll over into a full-blown ISA.

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Again, you have the option of simply putting cash into the Junior ISA and investing later. But with a timeframe of maybe a couple of decades, you may feel more comfortable putting money into one of the many high-quality investments currently at bargain-basement prices. Edinburgh Worldwide, Baillie Gifford’s global smaller company investment trust, for instance, is on a -11.3% discount to NAV as at 25 February; normally it has been trading around par over the past year. JPMorgan US Smaller Companies trust sits on a -9% discount, compared with its -1% average.

8. Could a LISA work for you?

As well as cash and stocks & shares ISAs, there’s another option that some investors may find suits their circumstances and can be opened and paid into alongside the other members of the ISA family, within the overall £20,000 annual limit.

The Lifetime ISA or LISA can hold cash or equities and is designed to help younger people save either for a first home or for retirement. You have to be aged 18 to 39 to open one, though you can keep paying into your account until you’re 50. Each year you can pay in up to £4,000, with the added bonus of an extra 25% from the government at the end of the year - which you won’t get with any other type of ISA.

That sounds pretty appealing – but the LISA has significant restrictions. Most importantly, it’s much less flexible than an ordinary ISA as you can only access your investment if you are buying a first property, aged 60 plus or terminally ill; take money out for any other reason and you’ll incur a 25% penalty. Its most useful role is as a short to medium term savings vehicle for property purchase, because of the government kicker.

9. Build your ISA alongside your pension

A pension is the most tax-efficient way to save for the very long term, because you get full tax relief on the money you put in (and employed people receive extra cash from their employers too). That means you’re maximising the amount being invested and growing over the decades. And even though your pension income is taxable when you eventually come to take it, you can take up to 25% of the fund free of tax.

In contrast, you pay into your ISA from taxed income, so there’s no upfront boost. But ISAs have their own attractions. First, all ISA withdrawals are completely free of tax; and unlike a pension (which you can’t access until age 55) you can dip into your ISA whenever you need to, so they’re good for medium-term financial goals.

There can also be real advantages to having a tax-free income stream from an ISA when you retire: it may enable you to increase your income without moving into a higher tax bracket, for example.

10. Spring clean and rebalance

Even if you don’t put any new money at all into your account, the end of the tax year serves as a useful reminder that you should take a look at your portfolio and ensure it’s well balanced across different company sizes, regions, investment styles and asset classes.

Most financial advisers recommend ‘rebalancing’ by selling a chunk of the holdings that have grown most over the year, to avoid the portfolio becoming heavily skewed towards those outperformers. This year, to be honest, that’s a tall order, as war in Ukraine has sent most markets into a tailspin at time of writing.

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But in more normal times, as enthusiastic growth investors will have learnt to their cost over recent months, even the most successful investments are likely to fall from favour at some point, so it’s good to keep broad exposure.