The end of the tax year is in sight, so if you invest in a stocks and shares ISA, then you only have a matter of weeks to use your annual ISA allowance. But what if you want to make a withdrawal?
Here’s what you should bear in mind before selling any shares this month.
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What’s the deal with the ISA deadline?
The 2021/22 tax year ends on 5 April. After this date, you won’t be able to put new money into a stocks and shares ISA and benefit from this year’s annual tax-free allowance.
The ISA allowance for the current tax year is £20,000, and it will remain at this level for 2022/23. In fact, this limit has been frozen since 2017/18, when it was raised from £15,240. Despite this, most will consider the existing limit to be rather generous.
Remember, anything you save in an ISA stays tax free year after year. That said, the government does reserve the right to change the ISA tax-free rules in the future. This means there’s no stone wall guarantee that investments held within an ISA will remain tax-free forever.
However, any changes to diminish the tax-free status of existing ISAs would be very unpopular. As a result, tax-efficient investors probably shouldn’t lose too much sleep about this.
Importantly, if you don’t use the ISA annual limit for this tax year, you lose it. Also, your annual ISA limit covers all types of ISAs. For example, if you’ve already stashed £15,000 in a Cash ISA, you’re only allowed to put £5,000 into another type of ISA during the same tax year.
Why should you think twice before making any withdrawals?
Amid the current volatility in the stock market, you may be thinking about withdrawing investments to protect yourself from further losses. However, if you are thinking along these lines it’s possible your portfolio does not align with your personal appetite for risk.
So, if you think this might be the case, it’s worth taking the time to understand your risk profile by taking The Motley Fool’s investment style quiz. If you find that you are overly invested, withdrawing shares may be the best option for you.
However, if you know you’re investing within your risk profile and you have a long-term horizon in mind, then there are two other reasons why you should think very carefully before withdrawing shares from a stocks and shares ISA.
1. The end of the tax year is just around the corner
If you choose to withdraw from your stocks and shares ISA right now and then choose to re-invest in future, you’ll miss out on this year’s annual ISA limit.
This is a particularly important point if you have more than £20,000 to invest. So, if you are tempted to withdraw funds, perhaps postpone your decision until the new tax year begins.
Of course, the stock market may fall heavily over the next three weeks, so that’s a risk to bear in mind.
2. Not all stocks and shares ISAs are flexible
If you do take out funds right now, don’t assume you’ll be able to re-invest before the tax year’s up.
To understand whether you’re allowed to replace any cash that you withdraw from a stocks and shares ISA, you have to determine whether or not it’s a flexible ISA. If you aren’t sure, check with your provider.
It’s worth knowing that according to Danny Cox, head of external relations at Hargreaves Lansdown, making ISAs flexible adds “an additional layer of reporting and administration”. This is the reason why many ISA providers decide against making their ISA products flexible.
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Can you open a new stocks and shares ISA before the tax year ends?
The current tax year ends on 5 April. Therefore, there is still time to open a new stocks and shares ISA and benefit from this year’s tax-free allowance. However, it’s best not to leave it too late as opening an account can take a few days.
To find the right account for you, take a look at The Motley Fool’s top-rated stocks and shares ISAs.
Please note that tax treatment depends on your individual circumstances and may be subject to change in the future. The content in this article is provided for information purposes only. It is not intended to be, nor does it constitute, any form of tax advice. Readers are responsible for carrying out their own due diligence and for obtaining professional advice before making any investment decisions.
