In the current 2022-23 tax year, you can put up to £20,000 into tax-efficient ISAs. You can split your allowance between a cash, investment, innovative finance and a lifetime ISA¹ if you want to and all gains will be free from income tax, tax on dividends and capital gains tax. However, with a lifetime ISA, you can only pay in up to £4,000.

Here, we look at how to choose investments for your investment ISA if you’ve decided that an investment ISA is suitable for you. You should bear in mind that investments can fall in value as well as rise. You may get back less than you put in.

Remember that if you invest outside an ISA, you won’t pay tax on profits made unless they are above the annual CGT allowance, which is £12,300 in the 2022-23 tax year. Profits that exceed this are subject to tax at 10% or 20% depending on your tax band. When you invest in an ISA, even if the profit you make is above this £12,300 threshold, you won’t have to pay CGT.

Similarly, the first £2,000 of dividends earned from investments held outside an investment ISA, are tax-free. This is known as the dividend allowance. If you exceed this threshold, you will be taxed at a rate of 8.75% for basic rate taxpayers, 33.75% for higher rate taxpayers and 39.35% for additional rate taxpayers. All dividends received on shares held in an ISA are tax-free.

There’s also no tax to pay on any interest you earn from cash, funds, gilts or bonds within an ISA. Outside an ISA, the personal savings allowance (PSA), enables basic-rate taxpayers to earn up to £1,000 interest in savings income a year tax-free, or £500 for higher-rate taxpayers. Additional rate taxpayers aren’t entitled to this allowance.

Bear in mind that tax rules can and do alter over time, and the value of any favourable tax treatment to you will depend on your individual circumstances, which can also change.

Match your spending goals to your investments

When approaching your investments, and anticipating returns, you’ll stand a better chance of success if you know at the outset what your goals are.

Think carefully about why you are investing. Are you putting money aside to cover future holidays, university costs for your children or are you hoping your investments will help you pay for a house extension? Your own reasons for investing will determine your investment time-frame.

The type of investments you choose will depend not only on how long you have before you will need your money but also the level of risk you are prepared to accept. If, for example, you are saving up for school fees which you will need in the next few years, you’ll probably be looking for less risky investments such as bond funds.