By Carl Drummond, Wealth Planner
The Individual Savings Account (ISA) allowance rose to £20,000 in the last tax year (2017-18), by far its most generous level since the ISA was launched 20 years ago. But are you making the most of this allowance? And if not, why not?
The amount invested in ISAs increased by £7.8 billion last year (2017-18)[i], driven mainly by more people investing in Stocks and Shares ISAs. But while these figures are heading in the right direction, individuals are still saving an average of just £6,409[ii] a year - well below their annual allowance.
For anyone who has spare money in a bank account, or investments that are not tax-efficient, this makes little sense. Here are five reasons why my starting point with clients is always the ISA:
If you don’t use it, you lose it - If you don’t use your ISA allowance in a given tax year, it’s gone. So, even if you don’t want to invest in a Stocks and Shares ISA today, you could put money into a Cash ISA, and move it into a Stocks and Shares ISA in the future if you prefer.
Interest from ISAs doesn’t impact your personal savings allowance (PSA) - If you’re a basic-rate tax payer, you can earn up to £1,000 in interest a year tax-free. If you’re a higher-rate tax payer, that reduces to £500. The good news is that any interest earned within an ISA doesn’t count towards this allowance.
The tax-free allowance makes a big difference - Any capital gains you make in excess of £11,700 a year are subject to Capital Gains Tax (CGT). This is 20% for higher-rate tax payers and 10% if you’re a basic-rate tax payer. Returns on a Stocks and Shares ISA are protected from Capital Gains Tax (CGT), and it makes a big difference. If, for example, you invest £20,000 at the start of each tax year for the next 10 years and achieve an average return of 5%, you will make a gain of £64,136. If you then withdraw that money in one lump-sum, say for building work or buying a new property, you would pay £10,487 in CGT if you’re a higher rate tax payer. An ISA wrapper protects you from that.
Sheltering your portfolio from dividend tax - Last year, the dividend tax allowance reduced from £5,000 to £2,000 a year. Even if your portfolio isn’t yet yielding £2,000 in dividends, you can protect yourself from future tax by ensuring those investments are held within an ISA tax wrapper now. If you’re a business owner and you pay yourself dividends, this becomes even more important as it all counts towards the same dividend tax allowance.
Don’t forget about the Junior ISA - You can also shelter up to £4,260 in a Junior ISA this tax year. 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.
The end of the tax year is approaching, so if you have yet to use your ISA allowance, please act now. If you have spare money, or investments that are not held within a tax-efficient wrapper, your adviser can help you re-direct that money so that you’re making the most of your tax-free allowances.