ISA’s don’t have to be complicated. But there is a little more to them than just putting your money in a cash ISA with your current account provider. While there’s so much advertising and discussion of ISA’s at this time of the year, it’s helpful to know the important points, in order to put yourself in the position to make an informed decision about your savings.
Saving or investing in an ISA is more tax efficient than doing so outside of one, so if you are in a situation whereby you are able to save or invest and you’re not using your ISA allowance, you need to consider maximising this tax efficient benefit.
Last year’s Budget heralded a big change in the world of ISA’s, so it’s worth making sure you’re up to date in order to make the most of your allowance before the tax year ends.
A new combined allowance: Previously there were different limits for Cash and Stocks and Shares ISAs. However, that’s changed and there’s now a combined £15,000 limit for this tax year. So, this means investors have the flexibility to put the full £15,000 into a cash ISA, the full £15,000 into a Stocks and Shares ISA, or divide the amount between the two as they see fit. This change only came into effect at the beginning of July, so if you were organised enough to have used your allowance before then and have done nothing since, you may still have the ability to fund your ISA further.
What’s the benefit?
Interest earned on money held in a Cash ISA is paid free of tax (gross rather than net). And so long as the money stays within the ISA wrapper, the interest paid remains tax free indefinitely. Depending on your tax status, you’re saving either 20%, 40% or 45% on the interest you receive, compared to cash savings outside of an ISA wrapper.
The big plus for a Stocks and Shares ISA is tax free growth on investments. No capital gains tax applies. If you’re a higher or additional rate tax payer you’ll also make a tax savings on any dividends received – dividend tax is capped at 10% within an ISA, but would be 32.5% and 37.5% respectively, for investments held outside an ISA.
Essentially, saving or investing in an ISA is more tax efficient than not. This is why using up your ISA allowance firstly is the general consensus for savers.
Investing in an ISA. Cash or Stocks and Shares?
This is the first main ISA decision any potential investor needs to make. Essentially, the answer lies in what type of investor you are; your time frame for savings and the level of risk you are able and willing to take. Having a Stocks and Shares ISA does not necessarily mean you have to take a lot of risk with your money – what’s important is ensuring the level of risk you do take is appropriate for your circumstances.
Cash: With interest rates showing no sign of moving this year, the rates available on Cash ISAs are expected to remain low for the foreseeable future. Shopping around is, as with most things, very advisable. Unfortunately, as a lot of Cash ISAs are offered by banks, obtaining a certain rate often requires a customer to have a bank account with that provider too. Another consideration is whether you want access to your money. Generally it’s the case that a better interest rate goes hand-in-hand with a longer fixed period in which you are unable to access your account. Any kind of Cash ISA that has instant cash access is likely to be offering a negligible interest rate.
A cash ISA provides an account that is sheltered from tax, but it’s an account that, in the present market, doesn’t provide an opportunity for real growth. And it hasn’t for a number of years.
Stocks and Shares: To obtain growth in your savings, investing in a Stocks and Shares ISA could be good option if you want to invest for the medium to long term. Where you invest, and the level of risk you take, will be depend on your personal circumstances and your tolerance to risk.
A key consideration for investing is ensuring you have a diversified portfolio that is suitable and meets your investing needs. Seeking advice can help you ensure your Stocks and Shares ISA is invested in such a way, and at an appropriate level of risk. Seeking advice can also ensure that investing in the stock market is right for you in the first place.
Make investing simpler
If you are investing in a Stocks and Shares ISA, and you are not in a position to set up and maintain a diverse, risk appropriate portfolio of investments yourself, it’s vital you let someone else take on the responsibility. This doesn’t have to cost loads either. Straight forward, online advice to help you set up and manage your investments is readily available. Along with investing in an ISA in the first place, receiving low cost regulated online advice is a no-brainer too.
Other content you might find interesting:
- Is it time to take your investment portfolio out of hibernation?
- Why stock market predictions don’t matter
- Can you afford to keep holding cash?
Any news and/or views expressed within this article are intended as general information only and should not be viewed as a form of personal recommendation. This article is not directed to, or intended for distribution or use in, any jurisdiction where such distribution would be prohibited. To the extent permitted by law, Wealth Horizon accepts no duty of care or liability for loss occasioned to any person acting or refraining from acting as a result of any material contained within this article. Where past performance is shown, this should not be taken as a guide to future returns. Investment in the stock market is not a suitable place for short term money. The value of investments and associated income may go down as well as up and you may not get back the full amount invested.
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