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Point of View

Why the humble ISA should be every investor’s starting point

By Carl Drummond, Senior Wealth Planner

According to Government statistics, just over 11 million ISA accounts were opened in the 2016/17 tax year, with an average investment of £5,558[1].  Of these, only 2.6 million were Stocks and Shares ISAs. Given there are over 30 million income tax payers in the UK[2], that’s a lot of wasted tax allowance.

It all adds up

You can save £20,000 a year into an ISA, and any returns you make are tax free. To illustrate why this can make a real difference to the money in your pocket, let’s assume you have maximised your Stocks and Shares ISA allowance each year for the last 10 years, achieving an average 5% return. As you can see from the table below, you will have saved £123,560, which has grown to £153,824 over 10 years, giving you a return of £30,264. This return is completely sheltered from the tax man, potentially saving you thousands in income and capital gains tax.
 

  Tax Year Annual ISA
Allowances
Total saved
assuming 5% return
Year 1 2008/2009 £7,200.00 £7,398.01
Year 2 2009/2010 £7,200.00 £15,174.52
Year 3 2010/2011 £10,200.00 £26,431.39
Year 4 2011/2012 £10,680.00 £38,757.38
Year 5 2012/2013 £11,280.00 £52,330.50
Year 6 2013/2014 £11,520.00 £66,844.65
Year 7 2014/2015 £15,000.00 £85,677.07
Year 8 2015/2016 £15,240.00 £105,719.59
Year 9 2016/2017 £15,240.00 £126,787.53
Year 10 2017/2018 £20,000.00 £153,824.25
  Total £123,560.00 £153,824.25
 

Investing in a Junior ISA

Don’t forget that you can also shelter money in a Junior ISA. You can invest up to £4,128 this tax year, and £4,260 in 2018/19. You will never be able to access these savings, and the child can only access it at the age of 18 years old, but it’s a good way of gifting money, and not paying any tax on the returns.

Parking money in a Cash ISA

If you’re not keen on investing in equities right now – especially since markets are so high - you can always ‘park’ your money in a cash ISA instead. Although returns on Cash ISAs are extremely low, it gives you the means of using your ISA allowance before it disappears. You can then move that money into a Stocks & Shares ISA at a time that suits you, or when equities are looking less expensive.

The dividend tax allowance

From April 2018, the dividend tax allowance will reduce from £5,000 to £2,000. For anyone with large holdings in equity-based collectives or shares, and business owners who pay themselves dividends, this makes it even more important to ensure as much of their dividend-paying investments are held within an ISA wrapper as possible.
 
My starting point with any client is that it’s vital you maximise your ISA allowance, and get on the front-foot for the new tax year. If you don’t use it, you lose it.

Past performance is not a reliable indicator of future results. Investing involves risk and the value of investments, and the income from them, may fall as well as rise and are not guaranteed. Investors may not get back the original amount invested

Investing involves risk and the value of investments and the income from them may fall as well as rise and are not guaranteed. Investors may not get back the original amount invested.