Your isa, your future – time to reimagine how to invest more tax -efficiently?
Each tax year, from the age of 16 we are each given an annual Individual Savings Account (ISA) allowance. The ISA limit for 2018/19 is £20,000, and anyone wishing to utilise their allowance should do so before the deadline at midnight on Friday 5 April 2019. The date marks the end of the 2018/19 tax year. It is a ‘use it or lose it’ allowance, meaning that if you don’t use all or part of it in one tax year, you cannot take that allowance over to the next year. Utilising your ISA allowance to invest tax-efficiently could lead to significant savings in Income Tax and Capital Gains Tax and even improve your potential returns. We’ve answered some typical questions we get asked about how to best use the ISA allowance to help make the most of the opportunities as this tax year draws to a close.
Q: WHAT IS AN ISA?
A: An ISA is a ‘tax-efficient wrapper’ designed to go around an investment. Types of ISA include a Cash ISA and Stocks & Shares ISA. A Cash ISA is like a normal deposit account, except that you pay no tax on the interest you earn. Stocks & Shares ISAs allow you to invest in equities, bonds or commercial property without paying personal tax on your proceeds. There are also Innovative Finance ISAs, Lifetime ISAs and Help to Buy ISAs (the latter being a type of Cash ISA).
Q: CAN I HAVE MORE THAN ONE ISA?
A: You have a total tax-efficient allowance of £20,000 for this tax year. This means that the sum of money you invest across all your ISAs this tax year cannot exceed £20,000 (Lifetime ISAs and Help to Buy ISAs have their own lower limits but still use some of the overall £20,000). However, it’s important to bear in mind that you have the flexibility to split your tax-free allowance across as many ISAs and ISA types as you wish, but you cannot have more than one of each type. For example, you may invest £10,000 in a Stocks & Shares ISA and the remaining £10,000 in a Cash ISA, but you cannot invest £10,000 in each of two Cash ISAs. This is a useful option for those who want to use their investment for different purposes and over varying periods of time.
Q: WHEN WILL I BE ABLE TO ACCESS THE MONEY I SAVE IN AN ISA?
A: Some ISAs do tie your money up for a significant period of time. However, others are pretty flexible. If you’re after flexibility, variable rate Cash ISAs don’t tend to have a minimum commitment. This means you can keep your money in one of these ISAs for as long – or as short a time – as you like. If the ISA is classed as a Flexible ISA, funds can be withdrawn and replaced in the same tax year without the replacement using up any more of the ISA subscription limit. On the other hand, fixed-rate Cash ISAs will typically require you to tie your money up for a set amount of time. If you decide to cut the term short, you usually have to pay a penalty. But ISAs that tie your money up for longer do tend to have higher interest rates. Stocks & Shares ISAs don’t usually have a minimum commitment, which means you can take your money out at any point. That said, your money has to be converted back into cash before it can be withdrawn.
Q: WHAT IS A HELP TO BUY ISA?
A: A Help to Buy ISA is an ISA designed to help first-time buyers aged 16-plus to save up a deposit for their home. It is possible to contribute up to £200 per calendar month plus an additional £1,000 lump sum at the start, up to an overall maximum of £12,000. The Government will add 25% to the savings, up to a maximum of £3,000 on savings of £12,000. If you pay into a Help to Buy ISA in the current tax year, you cannot also pay into another Cash ISA.
Q: COULD I TAKE ADVANTAGE OF A LIFETIME ISA?
A: You must be 18 or over but under 40 to open a Lifetime ISA. You can use a Lifetime ISA to buy your first home or save for later life. You can put in up to £4,000 each year until you’re 50. The Government will add a 25% bonus to your savings, up to a maximum of £1,000 per year. Any money invested in a Lifetime ISA reduces your annual ISA limit accordingly.
Q: IS TAX PAYABLE ON ISA DIVIDEND INCOME?
A: You don’t pay tax on any dividends paid inside your ISA. Outside of an ISA, you currently receive a £2,000 dividend income allowance within which dividends are also tax-free.
Q: IS CAPITAL GAINS TAX (CGT) PAYABLE ON
MY ISA INVESTMENT GAINS?
A: You don’t have to pay any CGT on profits. You make a profit when you sell an investment for more than you purchased it for. If you invest outside an ISA, excluding residential property, any profits made above the annual CGT allowance for individuals (£11,700 in the 2018/19 tax year) would be subject to CGT. For basic rate taxpayers, CGT is 10% or more if the gains don’t exceed the basic rate band when added to income (or 20% on any gains that do exceed the basic rate band). For higher and additional rate taxpayers, CGT is 20%.
Q: I ALREADY HAVE ISAS WITH SEVERAL DIFFERENT PROVIDERS.
CAN I CONSOLIDATE THEM?
A: Yes, you can – and you won’t lose the tax-efficient ‘wrapper’ status if you transfer them rather than encashing them. Many previously attractive savings accounts cease to have a good rate of interest, and naturally some Stocks & Shares ISAs don’t perform as well as investors would have hoped. Consolidating your ISAs may also substantially reduce your paperwork. We’ll be happy to talk you through the advantages and disadvantages of doing it.
Q: CAN I TRANSFER MY EXISTING ISA?
A: Yes, you can transfer an existing ISA from one provider to another at any time. If you want to transfer money you’ve invested in an ISA during the current tax year, you must transfer all of it. For money you invested in previous years, you can choose to transfer all or part of your savings.
Q: DO I STILL NEED A PERSONAL PENSION PLAN IF I HAVE AN ISA?
A: ISAs and personal pension plans are entirely separate, and both can – and most likely will – form part of your financial planning requirements. They both have tax-efficient benefits. An investment-based ISA such as a Stocks & Shares ISA could potentially grow your savings as much as a pension plan in the long term. However, personal pensions have benefits which ISAs don’t have. For example, the yearly tax-efficient pension allowance is higher than the yearly ISA allowance for most people. Also, besides tax-efficient income and capital gains within the fund, you also receive tax back on all your pension contributions. This is paid at up to the highest rate of tax you pay, up to a maximum of 45%. If you’re in a workplace pension scheme, your employer will also usually contribute to your pension plan. From 6 April 2019, the minimum employer contribution is at least 3% of your qualifying earnings (earnings between £6,136 and £50,000 as of the 2019/20 tax year). Pensions are not normally accessible until age 55. This means there’s no temptation to dip in early. An ISA can be a good way to supplement your personal pension planning. The yearly pension allowance is in addition to your annual ISA allowance. By using both allowances as much as possible, you’ll maximise your tax savings.
Q: WHAT HAPPENS TO MY ISA IF DIE PREMATURELY?
A: The funds within your ISA will pass in line with your Will or the intestacy rules if you don’t have a Will. The funds remain tax-free whilst your estate is administered. The rules on ISA death benefits allow for an extra one-off ISA allowance equal to the value of your ISAs to be given to your spouse or registered civil partner. If your spouse is inheriting your ISA funds, this enables them to keep those funds within a tax-free ISA wrapper if they wish (even if your ISA funds are not passing to your spouse, they still receive this additional one-off ISA allowance which they can make use of, using other funds if they wish).
LOOKING FOR WAYS TO MAKE YOUR MONEY WORK HARDER?
The ISA season is a great time of year to do a spring clean of your finances and explore new ways to give your savings a boost. Whether you’re new to investing or an experienced investor, we can help you consider the options available. To discuss your requirements, please contact me.
INFORMATION IS BASED ON OUR CURRENT UNDERSTANDING OF TAXATION LEGISLATION AND REGULATIONS. ANY LEVELS AND BASES OF, AND RELIEFS FROM, TAXATION ARE SUBJECT TO CHANGE. THE TAX BENEFITS RELATING TO ISA INVESTMENTS MAY
NOT BE MAINTAINED. THE VALUE OF INVESTMENTS AND INCOME FROM THEM MAY GO DOWN. YOU MAY NOT GET BACK THE ORIGINAL AMOUNT INVESTED. PAST PERFORMANCE IS NOT A RELIABLE INDICATOR OF FUTURE PERFORMANCE.