ISA Guide
If you have any savings or shares at all, you should no doubt have an ISA; it’s as simple as that. Why, you may ask? An ISA saves tax and therefore maximises returns. The way an ISA works will vary on the type of savings that you put in.
Cash ISA’s
When using a standard savings account, basic rate taxpayers must give 20% of the interest earned directly to the Government. For higher-rate taxpayers this increases to around 40%, and for ‘additional rate’ taxpayers it increases again to a whopping 50%.
So what is an ISA? Cash ISAs are simply savings accounts; however, the interest isn’t taxed. If someone was searching for a cash ISA paying 6% AER to be beaten, a basic-rate taxpayer would need a savings account which offered 7.5%, and for anyone in the top tax bracket, would need to find one offering a whopping 10%.
As with normal savings accounts there’s a variety of ISAs available, from instant access to fixed rates.
Stocks and Shares ISAs
Share based investments in various forms are also ISA-able. Shares in individual companies can be placed inside a self-select ISA, usually managed by stockbrokers.
A more common use of the shares allowance is for collective investment vehicles such as: unit or investment trusts. These are pooled investments where a selection of shares are picked by a ‘fund manager’ based on geographic/sector criteria with the value of the investment depending on the collective performance of the shares that have been picked.
There are two advantages when placing these investments inside an ISA:
Any profits which are made from share price increases aren’t eligible for capital gains tax.
It enables all the tax on bonds to be reclaimed.
Benefits of ISAs
Over the years, since they were first established, ISAs have gradually become less complex. Each tax year everyone aged 16 or over (for cash ISAs) or 18 (for stocks ISAs) has an ISA ‘allowance’ which sets the maximum amount that can be saved with the ISA from April-April. The limit, at the moment, is £10,680, of which up to £5,340 can be in cash.
5 April, the end of the tax year, is the deadline for any savings or investments that must be made. Unused allowances are lost for good. Meaning that an ISA should always be the first place any savings go, as after the tax year ends, savings or investments stay within the tax-free ISA wrapper, where they will continue to gain interest.
Picture courtesy of xJason.Rogersx
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