Why the UK tax year should end at midnight on the 5th of April is a bit of a historical quirk¹. But end it does, without fail. And it’s something no investor can afford to ignore.

That’s because of the government incentives in place to encourage us to save and invest more for our futures – whether that means paying for a house deposit or wedding, or something further in the distance, like helping you to fund your retirement.

Given how close we are to the end of the tax year, though, you could soon miss out on 2021/22’s tax-free allowances – £20,000 in the case of adult individual savings accounts (ISAs) and £9,000 in the case of Junior ISAs. (Different rules apply to pensions, but more on this later).

Have you maximised your ISA contributions this tax year? Can you and should you consider paying in more over the next few days? And if you haven’t got an ISA already, should you look to open one before the tax year ends and get on that first rung of the investment ladder²?

As passionate advocates of personal investing, you can probably guess what we think at Vanguard. But if unsure, here’s a quick reminder of the benefits of ISA investing. Always remember, though, that the value of your investments may fall or rise, so you could get back less than you invested.

Tax efficiency

ISAs enable you to shelter your investments from tax. Whatever you earn from your investments in an ISA, it’s none of HMRC’s business, regardless of how big these profits potentially become over time.

There’s no income tax due and no capital gains tax, dividend tax or interest tax. You don’t even have to report what your ISA holdings are on your annual tax return, so no paperwork too!

Flexibility

You can take money out of your ISA whenever you want. It’s not something we would encourage, unless tied to your investment goals. But it’s good to know you have that flexibility. Putting more of your hard-earned money into a Vanguard stocks and shares ISA also doesn’t mean you have to invest it at once. You can park it as cash before deciding on the funds you want to invest in. We even have a low-risk money market fund that you can use, if unsure³.

We believe the length of time spent invested in the market is important to your investment success and more important than trying to time the market. But, again, there’s nothing to stop you doing this.

Versatility

Once you are ready to put money to work, you can choose from over 75 individual funds – including exchange-traded funds (ETFs), actively managed funds and index funds – to build your own global portfolio, shaped by your investment goals. Or you can keep it simple and choose one of our ready-made fund portfolios.

What’s more, you can manage your account from any device, 24/7.

Don’t forget your pension

Now, ISAs can be used to support a wide range of different goals – short-term and long-term. What these are is up to you and can include your retirement planning.

But it’s important to appreciate the differences between ISAs and pensions, including self-invested personal pensions (SIPPs), which are affected by the tax-year deadline too.

SIPPs are less flexible than ISAs because your money is effectively locked in until retirement. You can’t touch it until then. That said, they are more flexible than pensions used to be – because you can now access them before the state retirement age at just 55 (rising to 57 in 2028) and you can do so in different ways, as is clear from our own SIPP, the Vanguard Personal Pension.

What’s more you get tax relief on SIPP contributions, which you don’t on ISAs. You get the basic-rate tax paid back into your SIPP automatically (so £20 for every £80 invested) and can claim back even more if you are a higher-rate or additional-rate taxpayer.

So that’s something else to bear in mind as the clock ticks down to midnight on 5 April – your annual private pension allowances, which amounts to 100% of your annual gross earnings up to a maximum £40,000 and includes any workplace pensions that are current as well as SIPPs.

Don’t forget also that you can carry forward unused pension allowances from the previous three tax years.

Time is of the essence, so get maxing on all the allowances available this year!

 

¹ Why the UK tax year ends on 5 April.

² If you already have ISAs elsewhere but wish to transfer your holdings to Vanguard, we suggest at this late stage that you max out your 2021/22 allowances with your existing providers first and wait until the new tax year due to the time it takes to complete transfers (typically 30 business days).

³ The Vanguard Sterling Short-Term Money Market Fund carries our lowest risk rating but is not entirely risk-free as the value of your investment can still fall. For more details, see the fund’s Key Investor Information Document.