A new tax year gives new ISA allowances for tax-free investments.
Sian Kentdemonstrates the value of ISAs and how they can really save you tax and help you get more from your savings.
The amount that you can save in an ISA has risen by almost £5,000 over the last three tax years making their generous tax treatment even more attractive. All gains are free of Income Tax and Capital Gains Tax (CGT) and in a “nod” to tax simplicity, ISA income and gains don’t have to be declared on your tax return. For the new tax year 2018/19 each UK resident aged 18 and over has an ISA allowance of £20,000. Children under 16 also have a Junior ISA allowance of £4,260. .
What is an ISA?
An ISA, or Individual Savings Account to give it its full name, is an approved tax wrapper for investments such as stocks and shares, certain collective investment funds and cash.
Who wants to be a (ISA) millionaire?
TThe ISA was introduced in 1999, replacing the Personal Equity Plan (PEP) which had been around since 1987. Although the amounts you can contribute have been restricted (it started at £7,000 and only rose to over £10,000 in April 2010) there are now over 1,000 ISA millionaires in the UK.
A couple aged 40 today can become ISA millionaires by age 60 if they both contribute £14,000 into an ISA assuming 5% growth on their investment each year.
However, if the couple make their investments outside the ISA the income and growth will be subject to tax and they won’t reach millionaire status until age 64. To achieve millionaire status by age 60, they will each have to contribute £17,250.
So, the ISA got you there four years earlier and for a lower outlay but the big difference is that the investments outside of the ISA, when turned into cash to buy that dream retirement home, are going to attract the attention of the tax man whereas the ISA isn’t.
At present you have a CGT tax-free allowance of £11,700 per year and then gains are taxed at 10% for basic rate taxpayers and 20% for higher rate and additional rate taxpayers. This means that up to 20% of your profits could be payable as tax to HM Revenue & Customs, but within an ISA, you get to keep every penny. In our example here, that’s a tax saving of up to £88,000.
The tax free advantages of an ISA are not just on the growth. Income generated and withdrawals from an ISA are tax free. Firstly, any dividends paid by a non-tax friendly investment would be taxed when you receive them. Secondly, if you want to switch funds or cash in your investment to use the money for something else, the proceeds could be taxed under the CGT rules.
What action can you take?
If you hold investments outside of an ISA, you should consider transferring them into a tax efficient wrapper such as an ISA. This will enable your fund to grow free of Income Tax but also when you choose to access the funds, they will not be subject to CGT. Seek advice from your Origen Adviser though as transferring other investments into an ISA may be treated as a disposal for tax purposes.
Don’t forget that you cannot make use of any unused ISA allowances from previous years and you could also consider using the ISA allowances of your spouse or partner. If you time the transfer to take place a few days apart but over two tax years say the 2nd April and the 7th April you could shelter £80,000 from the tax man between the two of you. Not bad for five days work!
Please note that when investing, your capital may be at risk. The value of an investment and the income received could go down as well as up. You may not get back what you invest.
Ask your Origen Adviser how you can use an ISA to protect your investments from tax and to get the best for your money.
This article is intended to be for information only and should not be taken as financial advice. Before you take any action you should seek advice to check the suitability and tax consequences.
CA2609 Exp. 04/19