Planning for the 2025/2026 Tax Year: A Guide to ISAs in the UK
Tuesday 15 April, 2025
With the commencement of the 2025/2026 tax year, it's an opportune moment to review your financial strategy, which could include Individual Savings Accounts (ISAs). ISAs offer a tax-efficient means to save or invest, and understanding their nuances can significantly enhance your financial focus.
Harry Goodship, Independent Financial Adviser in Ringwood explains ISAs
“Selecting the right ISA can make a real difference to your financial planning, especially when investing is involved. With so many options available, it’s important to understand which type best suits your goals, time horizon, and attitude to risk. ISAs can be incredibly tax-efficient, but they’re not one-size-fits-all. That’s why I always recommend speaking to a qualified financial adviser before making any decisions. Advice that’s tailored to your personal circumstances can help you make confident, informed choices that support your long-term financial wellbeing.”
Investing vs. Saving: Understanding the Difference
At the heart of financial planning lies the distinction between saving and investing. Saving typically involves setting aside money in secure, easily accessible accounts, yielding modest interest. It is often used for short-term goals or emergency funds, where capital preservation and accessibility are key. As a rule, inflation rates generally outpace savings account interest rates.
Investing, on the other hand, entails allocating funds to assets like stocks, bonds, or property, with the aim of generating a return over the long term. While investing offers the potential for greater growth, it comes with a higher degree of risk and typically suits those with a longer investment horizon. Your decision to save or invest, or indeed do both, should reflect your financial goals, timescale, and tolerance for risk.
Cash ISA
A Cash ISA operates like a traditional savings account but with the added benefit that the interest earned is completely tax-free. This type of ISA is typically suitable for individuals who prefer to avoid investment risk and want a simple, secure way to grow their savings. It is also a popular choice for emergency funds or short- to medium-term financial planning. While returns may be lower compared to other ISAs, the lack of tax liability makes it a valuable option for cautious savers. However, the long-term value of your savings may fall short when reviewed against inflation levels.
Stocks and Shares ISA
A Stocks and Shares ISA allows you to invest in a range of assets including company shares, bonds, unit trusts, and investment funds. The returns, whether capital gains, interest or dividends are free from income tax and capital gains tax. This type of ISA is best suited to individuals who are comfortable with the ups and downs of the market and are looking to grow their money over the medium to long term. The potential for higher returns exists, but so does the risk of losing some or all of your capital.
Innovative Finance ISA
An Innovative Finance ISA enables you to invest in peer-to-peer lending or other debt-based securities. Interest earned on these investments is tax-free. These ISAs are generally considered higher risk and may be more appropriate for experienced investors who understand the potential for borrower default and illiquidity. Due diligence and careful platform selection are essential when using this type of ISA.
Lifetime ISA (LISA)
The Lifetime ISA is available to UK residents aged 18 to 39 and is designed to help you save for either your first home or retirement. You can contribute up to £4,000 each year, and the government adds a 25% bonus on top, up to a maximum of £1,000 annually. You can use the money to buy your first home or withdraw it from age 60 for retirement. Withdrawals for any other reason will incur a penalty, making it important to use this ISA in line with its intended goals. The generous government bonus makes this a particularly valuable option for younger savers with specific long-term plans.
Junior ISA
Junior ISAs are long-term savings accounts for children under 18 and offer a tax-free way to build up savings for the future. A parent or guardian must open the account, but the money belongs to the child. They gain control at age 16, although they cannot access the funds until they turn 18.
For the 2024/2025 tax year, the contribution limit is £9,000. Returns are free from both income tax and capital gains tax. These accounts can be held as either Cash or Stocks and Shares ISAs and are an excellent way to plan for significant future expenses such as university or a first property deposit.
Tax Efficiency
One of the primary benefits of ISAs is their tax efficiency. All returns, whether interest, dividends, or capital gains are exempt from personal tax. This allows your money to grow more quickly over time compared to equivalent taxable accounts. For investors nearing or at the threshold of higher tax bands, this can be particularly advantageous, helping to manage both current liabilities and future estate planning goals.
Flexibility
With several types of ISAs available, they offer flexibility to suit a variety of needs and financial goals. You can contribute to different types of ISAs within the same tax year, as long as you do not exceed the annual ISA allowance (£20,000 for 2024/2025). This flexibility allows you to adapt your saving and investment strategy as your circumstances evolve, whether you are focused on short-term access, long-term growth, or specific milestones such as home ownership.
Compound Growth
The earlier you begin contributing to an ISA, the more time your money has to grow through the power of compounding. Compound growth means you earn returns not only on your original investment but also on the returns those investments generate. Over time, this can result in significantly higher overall returns, especially in Stocks and Shares ISAs or Lifetime ISAs where long-term growth is a key objective.
The Complexity of ISA Investments and the Importance of Professional Advice
While ISAs offer attractive tax benefits and the potential for long-term growth, the wide range of options and underlying investment choices can be complex to navigate. Selecting the most appropriate type of ISA, understanding market fluctuations, making full use of your annual allowances, and ensuring your ISA strategy aligns with your broader financial goals all require careful consideration.
Harry Goodship, Independent Financial Adviser in Ringwood said:
“By speaking with one of our Financial Advisers, you can access personalised advice tailored to your individual circumstances. Our advisers are highly experienced in helping clients make well-informed decisions that are fully aligned with regulatory guidance and designed to support long-term financial success.”
In Summary
As the new tax year has started, taking time to understand and review your ISA options is a wise step in financial planning. Whether you're looking to protect your savings from tax, invest for future growth, or plan for your child’s future, ISAs provide a versatile and valuable structure.
However, the decisions you make now can have lasting implications, so professional advice is recommended in navigating your choices with clarity and confidence. At Lonsdale, we’re here to help you make the most of your ISA opportunities in line with your financial goals for the 2025/2026 tax year and beyond.
Please note: The value of an investment and the income from it could go down as well as up. The return at the end of the investment period is not guaranteed and you may get back less than you originally invested. The information contained within this article is for guidance only and does not constitute advice which should be sought before taking any action or inaction. The information is based on our understanding of legislation, whether proposed or in force, and market practice at the time of writing. Levels, bases and reliefs from taxation may be subject to change. The Financial Conduct Authority does not regulate tax planning.
Sources:
https://www.gov.uk/individual-savings-accounts
https://www.gov.uk/apply-tax-free-interest-on-savings
https://www.fca.org.uk/consumers/investments
https://www.moneyhelper.org.uk/en/savings/types-of-savings/isas
https://www.gov.uk/junior-individual-savings-accounts
https://www.gov.uk/government/publications/budget-2024-documents
