Why open an ISA every year?
We look at five reasons why an ISA should be considered by every investor this tax year.
1. Generous tax free allowances
When ISAs were first introduced, each individual could only contribute a maximum of £2,400 each tax year. Since then, the ISA allowance has continued to increase year after year. This tax year 2020/21 investors can shelter up to £20,000 in an ISA meaning couples can contribute £40,000 between them into ISAs and shelter their capital from any tax immediately.
As an example of how invested contributions can scale up, if you had contributed the maximum amount to an ISA and PEPs
beforehand for each year since they became available in 1987, you would have invested over £263,000. Assuming this had been invested in a FTSE All Share Tracker fund, you would have built up over £783,000 in ISAs and had this value sheltered from tax.
2. Excellent tax benefits
ISAs offer the opportunity, over the years, to build a significant portfolio, free from UK tax. Unlike taxable accounts, investments held in ISAs are sheltered from UK income and capital gains tax. ISAs generally do accumulate to become large portfolios which makes the tax savings even more valuable. This is one of the key points; the more you invest and build up your ISA over the years, the more yield you are likely to see each year.
For example, the FTSE All Share currently offers a variable yield of around 3.5% Taking the pot, as above of £783,000, an All Share tracker might generate more than £27,000 of income over the course of a single tax year, completely free of UK tax. Remember however, tax rules can change and the value of any benefits will depend on your individual circumstances.
3. Don’t lose it, use it
Every tax years starts from 6 April, this tax year (2020/21) the ISA annual contribution level has increased by £4,760, you can now invest up to £20,000 across all your ISAs and protect your money from the tax man. However, unlike pensions you can’t roll over any unused allowance from previous tax years, so if you don’t use your ISA allowance before 5 April, you will have missed out on the opportunity to shelter more of your savings and investments from tax.
4. Free from capital gains tax and control
ISAs allow investors to make sound investment decisions without worrying about future tax implications. Many investors do not sell other investments when they perhaps should due to capital gains tax rules and implications. This can lead to poor returns and costly financial decisions. When investments are held in an ISA, they are free from capital gains tax and UK income tax and as a consequence they don’t need to be declared on tax returns. Being able to sell investments when you need to gives you full control, which is very important in the fast paced investment market place.
5. Full access and flexibility
ISAs are probably the most accessible tools to benefit from generous tax breaks given by the government. Unlike other tax-efficient accounts, savers and investors have complete access to their ISAs and can withdraw their money at any time, once their investments have been sold and the cash balance settled.
Additionally, ISA savers and investors are now able to transfer their accounts without restriction or tax charge. A Cash ISA can now be transferred to a Stocks & Shares ISA, and vice versa, giving savers and investors the full flexibility to move their ISA savings into the account which suits them best at their particular point in life.
Every investor should use the tax savings vehicles available to them, provided they are suitable for their needs. For many years, people looking to save tax have turned to a Stocks & Shares ISA. In fact over 12 million people contributed to an ISA last tax year and it’s easy to understand why.
The value of your investment and the income from it can go down as well as up and you may not get back the original amount invested. Past performance is not a reliable indicator for future results. Levels, bases and reliefs from taxation are subject to change and their value depends on the individual circumstances of the investor. Please contact us for further information or if you are in any doubt as to the suitability of an investment.
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