How ISA Accounts Beat the Taxman
Putting your savings into ISA accounts is an effective way to shelter your cash and investments from the taxman. ISAs really are a simple way to save money; one that everyone can benefit from.
Taxpayers are normally taxed on any interest gained from a savings account; ISAs however, are exempt from tax. This means that any interest that you gain is yours.
For a higher rate taxpayer, the benefits are significant; as ISAs build, year on year, the interest gained can be substantial, so it is worthwhile taking advantage of their tax-free status.
In these times of low interest rates, incentives to save are definitely needed. The government has increased this incentive to use ISAs by increasing the amount that can be saved in them.
The current limit on the amount that can be saved in an ISA is £10,680, with a maximum of £5,340 of that can be held in cash.
You may be wondering what other forms of saving there may be aside from cash; to answer that, you can also invest in ‘stocks and shares’ ISAs.
With a Cash ISA, savings are put into an ISA savings account. These are available with many major banks and finance providers. The amount of interest earned on cash ISAs usually rises and falls with the Bank of England base rate.
Balancing risk and reward
While Cash ISAs are the most straightforward and secure type of ISA, they also have limited capacity for growth. Stocks and shares ISAs have more potential for growth but are, as such, a more risky product. Many people choose to spread their ISA allowance between cash and stocks and shares, as this spreads the risk and diversify their portfolio
You can put many types of share-based investments into an ISA to make your gains tax exempt. Some people choose to manage their own funds and some use a stockbroker or a fund manager.
ISA rules
While ISAs are, overall, a simple and effective way to save, there are rules that you need to be aware of in order to maximise their benefits.
For example, many ISA products allow withdrawals, but it is important to remember is that once an amount is withdrawn, that amount cannot be put back into an ISA. In other words, if you invested the full amount in a cash ISA, and then withdrew £1000, you cannot later top the ISA back up as you have already used your full entitlement.
In the case of wanting to transfer funds to another ISA provider, this can be done but has to be done carefully. Rather than manually withdrawing the funds, it is important to arrange a transfer from one provider to another. This is fairly straightforward to do and your preferred provider should be able to arrange it for you.
When you stick to the simple rules of ISAs, they are a very tax efficient way of saving. Generally speaking, if you have money to save, you should use up your ISA allowance first. This will mean that you are getting maximum gains on your investment, which is always a good thing.
The value of tax savings [and eligibility to invest in an ISA] will depend on individual circumstances and all tax rules may change in the future. The value of investments can go down as well as up and you may get back less than you invested.
About the Author: George Pardew is an independent advisor on stocks and shares ISAs.
Processing your request, Please wait....
