ISA deadline is almost here – shield your savings from Rachel Reeves | Personal Finance | Finance

If you don’t use this year’s £20,000 ISA allowance by the cut-off at midnight on Saturday April 5, you’ve lose it for good. So take full advantage while you can. ISAs allow you to save and invest and take all your returns free of income tax, capital gains tax (CGT) and dividend tax, for life. They’re more valuable than ever as Chancellor Rachel Reeves tightens the tax burden.

She even floated the idea of slashing the annual Cash ISA allowance to just £4,000. This now seems unlikely in Wednesday’s Spring Statement, but highlights how vulnerable ISAs are to changes in tax policy. That’s another reason to use as much of your allowance as you can afford.

Savers can invest up to £20,000 in either a Cash ISA or Stocks and Shares ISA, or a combination of the two.

Your choice partly depends on your risk appetite. Cash ISAs offer stability but lower returns over time, while Stocks and Shares ISAs are more volatile but should provide a higher total return over the longer run.

With global stock markets highly volatile right now, the decision is tougher than ever. However, securing your tax benefits should be the top priority.

Cash ISAs

Cash ISAs are sold by banks and building societies. They work like a standard savings account, the difference is that all your interest is free of tax for life.

Outside an ISA, 20% basic-rate taxpayers can earn only £1,000 interest tax-free under the Personal Savings Allowance (PSA).

The PSA halves to just £500 for higher-rate 40% taxpayers and disappears altogether for additional rate 45% taxpayers.

With rising savings rates and frozen tax thresholds, more than two million savers are now breaching PSA limits, AJ Bell figures show, making Cash ISAs increasingly valuable.

A basic rate taxpayer who saved their full Cash ISA allowance every year for five years could save £981 of tax in that time. A higher rate taxpayer would save £2,806, figures from Hargreaves Lansdown show.

Stocks and Shares ISA

The Stocks and Shares ISA is even more powerful. Within this wrapper, all capital gains and dividend income are tax-free for life. That’s a huge benefit as returns from shares and investment funds held outside of an ISA face ever harsher tax rules.

Growth is subject to capital gains tax (CGT) if above the reduced annual exempt amount of £3,000. This is charged at 18% for basic-rate taxpayers and 24% for higher and additional-rate payers.

Dividend income from non-ISA is also taxed, if it exceeds £500 a year.

Basic-rate taxpayers pay dividend tax at 8.75%, which rises to 33.75% for higher-rate taxpayers and 39.35% for additional-rate taxpayers. Keeping investments within an ISA will spare you these charges.

Better still, you don’t even have to mention your ISA holdings on your tax return, making life simpler.

There’s a lot at stake. A basic rate taxpayer who invested their full allowance in a Stocks and Shares ISA for 10 years could save £8,521 in tax, Hargreaves Lansdown figures show.

A higher-rate taxpayer could save £19,336 while an additional rate 45% taxpayer would save £21,358.

Sarah Coles, head of personal finance at Hargreaves Lansdown, said it’s easy to see why ISAs are so popular. “You save an awful lot of tax. If you qualify for a Lifetime ISA, or LISA, the benefits are even more substantial.”

LISAs are open to savers aged 18 to 39. The government adds a 25% bonus to contributions, worth £1,000 year on the £4,000 maximum annual contribution. Once you’ve opened one, you can carry on saving until age 50.

This is a great way for younger people to turbo-charge their savings, but there are restrictions.

The money must be used to buy a first home or saved until 60 for retirement. There are exit penalties if money is withdrawn for any other reasons.

The Junior ISA (JISA) provides another opportunity, with parents and grandparents able to contribute up to £9,000 a year.

The money belongs to the child when they turn 18, at which point it can either be withdrawn or rolled over into an adult ISA, with all tax advantages intact.

Too many are wasting this opportunity. So don’t let your ISA benefits go to waste. Maximise your allowance before the tax year ends.