April 2010
You will have heard the old saying; “there are only two things certain in life, death and taxes”. While death is impossible to avoid there are a number of things that you can do to reduce the amount of tax that you pay now and reduce your tax bills in the future.
The 5th April signals the end of the current tax year and this is significant because each year an individual loses a number of tax allowances that cannot be carried forward or regained in the future. One of these tax allowances is the annual ISA allowance.
An Individual Savings Account is one of the most significant tax breaks that an individual can benefit from. Basically an ISA is a tax shield which protects your selected investments from tax charges. This means that the investment returns are free from all personal UK taxes; in other words you will pay no income tax, no capital gains tax on growth and no savings tax on interest.
Currently everyone under the age of 50 can invest £7,200 into an ISA, up to £3,600 of which can be invested into a cash ISA. The remainder can be invested into a Stocks & Shares ISA. From 6th April this year the limit will increase to £10,200 with up to £5,100 being able to be invested in a cash ISA.
This may not seem like a lot now given low interest rates, however if you managed to save your full allowance for the next 10 years you would have a pot of £102,000 (excluding growth). This money could be used for many things whether it is retirement, children’s university fees, personal dreams whatever.
And the pot of money is free from UK personal tax no matter what your tax situation is. This is significant. If interest rates were 2.5% per annum you would receive growth of £2,550 rather than £2,040 if you are a basic rate tax payer or £1,530 if you were a higher rate tax payer.
Whether you put your money into a Cash or Stocks & Shares ISA depends on your personal situation, however if you have money saved in other bank accounts I would encourage you to consider putting it into a cash ISA each tax year. The tax savings will add up over time.
And don’t forget to shop around for rates. Most of the banks and building societies are keen for you to invest your cash ISA with them and are offering better rates than normal.
Here are some other facts about ISAs that you may not have known;
You can have more than one ISA. Each tax year you are allowed to invest in a cash ISA and a Stocks & Shares ISA and it does not have to be the same provider that you invested with in previous tax years.
You are allowed to transfer your ISAs to a different provider to avail of a better interest year, and even pool them together so they all get that rate (though cash and Stocks & Shares ISAs must be separate). Some providers are not allowing transfers for their ‘special offer’ interest rates so read the small print. Also make sure you confirm to your existing and new provider that it is a transfer otherwise the ISA wrapper may be unwrapped.
You don’t have to declare ISAs or their interest or growth on your tax return.
You should invest in ISA as early as possible after the start of each new tax year on 6th April. This means that your investment has the benefit of tax efficient growth for that whole tax year. Many people wait until nearly the end of the tax year and miss the whole year’s tax benefits.
ISAs can also save you tax in the future as in addition to the ongoing tax shield any income or interest taken from ISAs in retirement do not currently affect the increased age tax free income allowance.
There are lots of good rates out there at the moment so do shop around before you commit to investing. www.moneysupermarket.com is one comparison site which will show you an overview of what’s on offer. Remember to read the small print.
Jason Holmes owns Lumen Financial Planning, a local fee based financial planning company. He can be contacted on 028 9044 7102 or Jason@lumenfinancialplanning,com