New Tax Year – New ISA?
Which type of ISA is right for me? We round up the four main options for savers and investors looking to protect their cash from the taxman
Anyone wishing to protect their savings or investments from the taxman, would be wise to consider opening an Individual Savings Account (ISA) if you haven’t already.
You can think of an ISA as a shield that protects savings or investments from being subject to taxation.
There are four main types of ISA you can take advantage of: cash, stocks and shares, lifetime and one specifically for children, the junior ISA.
Every tax year you can put money into one of each kind of ISA. With the new tax year now begun now is a great time to start a new savings or investing habit.
You can save up to £20,000 in one type of account or split the allowance across some or all of the other types.
For those who want to save or invest towards their child’s future there is also the junior ISA. There is a separate £9,000 annual allowance for this which is not included as part of the £20,000 adult allowance.
Most people either opt for a cash ISA or a stocks and shares ISA. Cash is safe but the returns are way below the rate of inflation so you are effectively ‘losing’ money each year. Investments offer great potential returns but there is a risk values will rise and fall and most offer no capital security.
Those saving into a cash ISA will shield any interest they earn from being taxed, while those using a stocks and shares ISA won’t be subject to tax on any dividends or capital gains.
We have put together a quick summary of each type of ISA to help you decide which might be best.
Cash ISA
Anyone who is a resident in the UK and aged 16 or over can save into a cash ISA.
Without a cash ISA, any interest earned will only be tax free up to a certain level, due to the personal savings allowance.
This allowance means basic rate taxpaying savers won’t need to pay tax on the first £1,000 of interest they earn. Higher rate taxpaying savers are afforded protection up to £500. However, additional rate taxpayers have no such allowance.
With savings deals paying so little at present, the interest rate will likely be far more important to the majority of savers than the tax free wrapper. Therefore cash ISAs may only benefit those with large amounts of savings.
It’s also worth noting that cash ISA savings rates are currently lower than the equivalent standard savings rates offered on the market, so it’s worth checking whether holding your savings in an ISA would actually earn you more.
Stocks and shares ISA
Any UK resident aged 18 or over can invest in a stocks and shares ISA.
Those investing outside an ISA will often receive dividends from their investments.
Although there is a £2,000 personal allowance once your dividend income exceeds this in a given tax year, you will start paying tax.
In this new tax year basic rate taxpayers will be taxed at 8.75 per cent whilst higher rate taxpayers will be taxed at 33.75 per cent.
Any stocks and shares sold outside an ISA will also be subject to capital gains tax, although there is a personal allowance of £12,300 a year for this.
Capital gains tax can be charged on any profit you make on an asset that has increased in value, when you come to sell.
For stocks and shares you will be charged 10 per cent if you are a basic rate taxpayer and 20 per cent if you are a higher rate taxpayer.
It therefore can be very beneficial to use an ISA to avoid this costs, particular as your investments are likely to snowball over time.
Junior ISA (JISA)
JISAs can be opened for anyone aged under 18 living in the UK, and parents can contribute up to £9,000 each tax year.
Parents can either opt to use the tax free wrapper to either save or invest towards their child’s future.
When saving into a cash JISA all interest earned will be shielded from tax, while those who invest in a stocks and shares JISA will be shielding any dividends or capital gains from the taxman.
The £9,000 JISA allowance is separate from an adult’s personal ISA allowance meaning if you are someone capable of making full use of your own £20,000 ISA allowance each year, you won’t be using up your own tax free allowance when contributing into it.
However, for all its positives, parents need to be aware before saving or investing in a JISA, that once the child turns 18, it becomes their money to do what they like with.
For those opting to save into a JISA, the returns on offer are actually much better than adult cash ISA options.
Lifetime ISA
This is a great option for those saving towards a deposit for their first home and can be used as part of your annual personal £20,000 ISA allowance.
Savers under the age of 40 can open a Lifetime ISA (LISA) and until they hit 50, the Government will chip in £1 for every £4 they save, giving a £1,000 bonus on the maximum £4,000 a year you can save.
That money can either be used towards a deposit on a first home or be withdrawn from the age of 60 to help fund retirement.
However, there are two crucial rules to be aware of.
First, whether buying individually or as a couple the value of the property must not exceed £450,000.
You may also end up worse off if you decide to cash in the ISA before 60 without buying a first home. This is because a 25 per cent penalty applies to the amount withdrawn in this case.
Like with the standard ISA, you can either choose to save or invest your money via a LISA. However, your options are more limited.
If you would like some help working through these option, investigating the best rates or planning for the future in general then give us a call or drop us an email.
Tel: 01733 314553 Email: info@brookswealth.co.uk