It’s perfectly normal to be nervous about putting money into the markets during uncertain times, such as the conflict in the Middle East, but that shouldn’t stop you from taking advantage of the generous ISA allowance.
Investors have the option to put money in their Stocks and shares ISA or Lifetime ISA now and invest another day. By topping up your ISA before the end of the tax year (5 April), you lock in tax benefits that could yield rewards down the line.
Up to £20,000 can be paid across the range of ISAs each tax year. But it’s a ‘use it or lose it’ situation. If you don’t use the full allowance, you cannot roll over any unused component to the next tax year. That’s why it is important to consider deploying any spare cash into your investment ISA now, so you can put it to work once you’re ready and enjoy tax benefits.
Why markets have been volatile
Stock markets have been wobbly since the start of March as a sharp jump in oil and gas prices has negative connotations for consumers and businesses. Costs could go up, and economic activity could be restrained. That creates uncertainty, making some investors slightly more cautious.
Many people will be happy to keep putting money into the markets via regular investing, but others might choose to sit tight until there is clarity on how long the Middle East conflict could last.
If you fall in the latter camp, putting money into your ISA now means you’ve got money ready to invest once the market backdrop improves, and you’ve already shielded any future gains from the taxman. Even when it may seem like an insignificant sum to hold outside an ISA, the returns can quickly become large enough to be taxed, leaving you with a bill to pay and paperwork.
Holding money outside an ISA? These taxes could hit you
Savers
If your money is held in cash, any interest will be classified as income. Basic rate taxpayers have an allowance of £1,000 of savings income before they start paying tax, while higher rate taxpayers have a £500 allowance and additional rate payers have no allowance.
After your allowance is used up, the money you earned as interest will be taxed as if it was any other income, so 20% for basic rate taxpayers.
Investors
If you invest outside an ISA, you could be hit with a tax bill sooner than you think. While capital gains tax only applies once you sell, you could be hit with dividend tax much sooner. Each investor has a yearly dividend tax allowance of £500. That remains the case even if that £500 is not being paid directly to you. If you invest in a fund that reinvests dividends for you, that still counts towards your dividend allowance.
How much of an impact can those two taxes really have? Let’s say a higher rate taxpayer, Pippa, inherits £10,000 when her grandmother passes. The money is held in a fund that’s outside an ISA, with a yearly investment growth of 4% and an annual dividend yield of 3%, creating a 7% total return after fees. Pippa wants to save this money for down the line, but she lives a busy life, so she just lets the money sit in that account. All the dividends are reinvested.
If Pippa let that money compound outside an ISA, instead of moving it inside one, she could have £3,791 less in 15 years compared to investing with an ISA.
Most of this is caused by having to pay capital gains tax once she takes money out at the end of the period, costing her £3,410. Another £337 will be lost to dividend tax.
Moving investments in a tax wrapper such as an ISA sooner rather than later is the only way to guarantee you aren’t caught off guard with an unexpected tax bill.
How to move your money
The most efficient way to move your funds into a tax wrapper is through using the Bed and ISA strategy. This involves selling the investments from your dealing account and repurchasing in your ISA.
You will at this stage have to pay capital gains tax on any gains above the £3,000 allowance, but it will likely save you money further down the road. There could also be some dealing fees, but, if you do this within the same provider, you may not face all the charges you typically could for buying and selling investments.
Once this process is done, the investments in your ISA will be safe from tax, leaving you with a clearer head and a (hopefully) thicker wallet.
Hannah Williford: Content Writer
Hannah joined AJ Bell in 2025 as an investment writer. She was previously a journalist at Portfolio Adviser Magazine, reporting on multi-asset, fixed income and equity funds, as well as macroeconomic impacts and regulatory changes...
