The number of Stocks and Shares ISA investors has rocketed over the past decade. And there are good reasons to expect demand for these tax wrappers to rise in the next tax year. Here are three of them.
#1: Interest rates should fall
The returns that cash savers have received since late 2021 has been steadily rising. As the Bank of England (BoE) has increased its benchmark rate, the rates on traditional savings products have followed higher.
Interest rates on savings accounts remain weak by historical standards. Moneysupermarket.com says that the best-paying, no-notice Cash ISA (offered by Leeds Building Society) currently has a rate of 2.25%. Yet the relative ease, and the safe-haven quality of these products, means their appeal has risen as rates have trekked higher.
But this could be about to change later in 2023 once the BoE likely stops raising interest rates. In fact, the market believes policymakers might start reducing its benchmark around the middle of the year as inflationary pressures recede.
The returns from savings accounts might start to fall away again from the 8% long-term average return that share investors enjoy.
#2: Non-ISA allowances to drop
Demand for Stocks and Shares ISAs should also benefit from upcoming changes to dividend and capital gains tax (CGT) allowances.
The CGT allowance stands at £12,300 for individuals and personal representatives today. But this will plummet to £6,000 from April and then to £3,000 in 2024’s tax year.
The current dividend allowance of £2,000 will also fall to £1,000 next year and then to £500 in the 2024 tax year.
Tax isn’t something that ISA investors need to worry about. These tax wrappers allow individuals to stash up to £20,000 away each year without having to worry about HMRC grabbing a slice.
Please note that tax treatment depends on the individual circumstances of each client and may be subject to change in future. The content in this article is provided for information purposes only. It is not intended to be, neither 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.
#3: ISA allowance to rise?
Finally, ISA adoption could also pick up if the government decides to raise that £20,000 annual deposit limit. Allowances haven’t been raised since the 2017/2018 tax year. And some argue that this is long overdue.
Again, one reason for this is high inflation. The rate at which prices are rising means that £20,000 saved in a Stocks & Shares ISA today is worth less in real terms that it was a year ago. Elevated levels of inflation are tipped to persist for some time too.
A growing State Pension crisis might also prompt a rise in the ISA threshold. The government is placing an increased onus on individuals to save and invest for retirement to help the public finances. Increasing the ISA allowance might be a way to encourage people to do this.
Why I use an ISA
I use a standard Stocks and Shares ISA to invest in UK shares. I’ve invested, for example, in dependable, cash-generative FTSE 100 companies including Unilever, Diageo and Coca-Cola HBC. I’ve also gained exposure to fast-growing industries like green energy by acquiring shares in The Renewables Infrastructure Group.
Furthermore, I’ve sought to capitalise on lucrative emerging markets with shares like Asia-focused Prudential and mega miner Rio Tinto.
Balanced portfolios like mine can significantly boost my chances of making long-term wealth. And doing so within a tax-efficient ISA can help to really boost these returns.
The post 3 reasons why Stocks and Shares ISA demand might rocket! appeared first on The Motley Fool UK.
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Royston Wild has positions in Coca-Cola Hbc Ag, Diageo Plc, Prudential Plc, Renewables Infrastructure Group, Rio Tinto Group, and Unilever Plc. The Motley Fool UK has recommended Diageo Plc, Prudential Plc, and Unilever Plc. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.