It is almost the end of the tax year, and time to ask yourself whether your financial arrangements are making the most of your tax position.
In this, the first of a 3-part series, we look at making the most of your ISA allowance for 2019/20, and why there could be more to it than simply putting the total allowed into an existing ISA.
As with every tax year, you have until 5th April to take advantage of your ISA allowance. If you don’t, that allowance, and the chance to enjoy tax efficient status for your savings or investments is lost for good.
You still have time to invest £20,000 to use your 2019/20 allowance, and you will have another ISA allowance in 2020/21. That means you could invest up to £40,000 over the next few weeks, if you invest as a couple, and you will be able to utilise your new ISA allowance in the 2020/2021 Tax year.
But the question is should you, and what is the best way to do it?
Do you need an ISA?
Most types of savings and investment are subject to tax. The taxman will help himself to a share of the interest your money earns.
He might not take as much as he used to. The personal tax allowance lets you enjoy the interest from small savings accounts deposits free from tax. But as soon as your savings earn more than £1000 interest a year, he will start to take a share, and he will start even sooner if you are a higher rate taxpayer.
With an ISA, the taxman cannot help himself to your money. All the interest, income and capital gains generated in your ISA remain yours. It means that an ISA is a simple and tax-efficient way to grow your wealth.
The answer to the question ‘Do you need an ISA?’ for many people with adequate savings is simply ’yes’.
But what kind of ISA should you have?
All ISAs can offer tax efficiency, but they are not all created equal. There are now several types that you might want to consider as homes for your investment allowance.
Cash ISAs are simple savings products, which means that your money is completely safe (provided it’s a UK regulated provider and you have under £85,000 saved) because it is protected by the government’s Financial Services Compensation Scheme (FSCS).
But a Cash ISA means that currently growth will be low. Interest rates are not much more exciting than high street savings accounts at present. You may wish to transfer it into a Stocks and Shares ISA for the prospect of greater returns, however, your capital is at risk.
Stocks and Shares ISA
Stocks and Shares ISAs could provide a more rewarding answer, because they are an investment. Your money will be invested in a shared fund, you can at least choose the fund to suit your approach to investment risk.
Innovative Finance ISA
Innovative Finance ISAs allow the tax advantages of ISA investment to be combined with peer-to-peer lending. So, you can invest £20,000 in an approved provider, and enjoy the interest generated by the loans free of tax in perpetuity. Some providers seem to offer attractive returns, but the risk may be higher than other ISA investments. This type of ISA may not be suitable for certain types of investors. Innovative ISAs are not protected under the FSCS compensation scheme. Investors could lose all their investment.
The Lifetime ISA
Lifetime ISAs are available if you are between 18 and 40, they allow up to £4,000 from your allowance to be saved each tax year and earn a government bonus of 25% but they can only be used for buying a first home, or to fund retirement.
So, what is the ISA for you?
At Continuum we believe that most people may be better off with an ISA, or a combination of ISA products and that if you cannot afford to invest £20,000 every year, making the most of your allowance, perhaps with monthly contributions could help you reach your financial goals.
However, there are various ISAs on the market – and so many providers competing for your attention and money that it can be hard to know what direction is right for you and your allowance.
We can help you find the ISA or ISAs that are right for your circumstances.
Download our expert guide to tax efficient investing and talk to your Continuum adviser – or call us.
The information contained in this article is based on the opinion of Continuum and does not constitute financial advice or a recommendation to suitable investment strategy, you should seek independent financial advice before embarking on any course of action.
The value of investments can fall as well as rise and you may get back less than you invested.
Investors do not pay any personal tax on income or gains, but ISAs do pay unrecoverable tax on income from stocks and shares received by the ISA managers. The tax rules applying may be subject to future change.
Equity investments do not afford the same capital security as deposit accounts.
The Financial Conduct Authority does not regulate taxation advice.
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