Are you maximising your family’s ISA allowances?

When we think about individual savings accounts (ISA), most of us will just consider our own personal allowances. But, if you really want to maximise the amount of money that you can shelter from tax, it’s worth making it a family affair.

Each year, for example, a family of four with two kids under the age of 18 can pay £58,000 into ISAs between them, with adults able to invest £20,000 each a year and children, £9,000.

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Any money that is paid into those ISAs will grow tax free and there will no tax to pay on withdrawals either; this includes income, dividends and capital gains.

Let’s run through the key considerations.

Adult ISAs

The starting point is to make sure you’re invested in the right type of ISA, as you can spread your £20,000 allowance across a mix of the cash and stocks & shares versions. Just note that the allowance for cash will drop to £12,000 a year for under-65s from April 2027.

Last year was a record for cash ISAs, with £57 billion paid in, according to the latest Bank of England figures. But while cash accounts are great for emergency savings and any known expenses you might have over the next few years, the risk over the longer term is that they won’t keep up with inflation and will actually lose value in real terms.

So, if you have any money that you won’t need to touch in the next five years or so, you will likely get better returns if you pay it into a stocks & shares ISA (the longer your investment horizon, the more time you have to ride out short-term volatility and capitalise on the compounding of investment returns).

According to the Barclays Equity Gilt Study in 2024, the probability of shares outperforming cash over the last 130 years was 70% over any two years or 91% over a decade.

You can pay lump sums into your ISA or, if you prefer a lower-risk approach, you can drip feed money into your account each month. This protects larger sums from short-term stock market drops and smooths out your returns. It also removes any temptation to try and time the market, which can put some potential investors off. The downside is that if markets rise quickly, you’ll miss out gains if you didn’t invest your lump sum in one go.

If you’ve got money in standard cash accounts, it’s straightforward to pay it into a stocks & shares ISA. You can also transfer existing cash ISAs into stocks & shares ISAs to ensure you don’t unnecessarily use up any of this year’s allowance (which can be arranged by your new ISA provider).

If, on the other hand, you have existing investments in trading or investment accounts (such as funds, investment trusts or direct share holdings) it also makes sense to bring them into the ISA fold.

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Bed & ISA

The 30-day rule prevents you selling shares and buying them back within that time frame for tax purposes. However, it is possible to sell them and then immediately rebuy them within a stocks & shares ISA, using the so-called Bed & ISA process – so long as you have enough ISA allowance remaining.

Swingeing cuts to the capital gains tax (CGT) annual exemption (from £12,300 in 2023-24 to a current level of just £3,000) mean it’s increasingly important to shelter investments from tax with tax-free wrappers such as ISAs (or pensions). The annual exemption can only be used in a year that gains are realised, so unless gains are managed each year, even modest investors can face a substantial tax bill when they come to sell.

To complete a Bed & ISA you need to ensure both your trading account and your ISA are on the same investment platform. You also need to be careful not to realise gains in excess of the annual exemption for CGT, otherwise you may face tax charge on the transfer.

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The importance of timing

If the amount you can pay into ISAs exceeds your remaining ISA allowance, you may be able to spread it across two tax years – if you’re organised, this needn’t be a lengthy process. For example, you can use your remaining allowance before the end of the tax year (5 April) and invest up to £20,000 on the first day of the new tax year (6 April).

It’s also important to note that your £20,000 annual allowance works on a ‘use it, or lose it’ basis, so if you don’t use your full allowance one year, you can’t roll any of it over to the next.

Investment platforms will take contributions into ISAs right up to the last day of the tax year, but if you want to complete a Bed & ISA, it’s worth allowing a bit more time.

Teamwork for couples

If you have used up your £20,000 ISA allowance, but your spouse or civil partner has not used theirs, you could consider teaming up with them and paying money into their ISA to boost your combined wealth.

It’s also possible for these couples to transfer investments to each other without incurring CGT.

You just need to be mindful that this isn’t just about parking your money in your other half’s ISA until you need it back. It needs to be an outright gift and once the transfer is made the money will legally be theirs, so you need to both be working together and towards the same goals.

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Junior ISAs

If you want to save for your children’s future, you can also take advantage of the £9,000 Junior ISA allowance.  

Other family members can pay into it too, including grandparents, in many cases as part of their own tax-planning strategy. Regular payments into a child’s account could be immediately free of inheritance tax (IHT), if they are paid from surplus income.

As with adult ISAs, parents can choose between cash and stocks & shares accounts – the key difference is that children won’t be able to access the money until they turn 18.

Although parents might be wary of taking risk with money they are saving for children – it’s worth thinking about stocks and shares for better returns. The fact that the money will be tied up until they’re adults means they have the time to ride out short-term volatility.

And investing in the stock market doesn’t have to mean taking undue risk. It can be about choosing well-diversified options, such as global funds, which seek to deliver consistent returns.

How will children spend their money?

Junior ISAs can help your children cope with some of the many expenses they’ll face as a young adult – whether that’s going to uni, travelling, buying a car or putting down a deposit on their first home.

But parents may still want to think very carefully about the amounts they pay into their children’s JISAs. While you might talk to them about the money and encourage them to make sensible choices, it will ultimately be down to them how and when they spend it.

That means if you have enough of your own ISA allowance remaining (bearing in mind couples will have £40,000 a year between them) it may be more practical to use your ISA to save for your children and earmark funds within it for them.

By using your own ISA, you’ll have full control over how much you give your children and, perhaps more importantly, when.

If you have already used your ISA allowances, Junior ISAs become more compelling, providing a substantial extension to the amount of money families can shelter from tax – but, in these cases, the benefits of tax saving need to be weighed against concerns around loss of control (which will vary from one family to the next).