BLOG: Seven reasons to use your ISA allowance
With the 2015/16 ISA deadline looming, ISAs are one of the best ways to invest while sheltering your money from the taxman.
Here are the reasons why they’re so popular with investors:
1. By using your ISA allowance each year you can gradually build your own personal “tax haven”. There is no capital gains tax on profits, no tax on interest earned on bonds or cash, and no further tax to pay on dividends – so no need to fill in a tax return. Remember, though, tax legislation can change.
Tax on dividends
2. Taxation on dividends is set to rise for some. From 6 April 2016 all dividend income will be treated as gross and the rate of tax payable on dividends will depend upon the investor’s other taxable income. Essentially, beyond the new £5,000 tax-free dividend allowance (which is on top of the income tax personal allowance), the personal tax rates on dividends increase by 7.5% compared with 2015/16. How this affects you will depend on your circumstances, but sheltering assets in Stocks and Shares ISAs will become even more valuable for many people.
3. Investing in an ISA needn’t be a significant financial commitment. The limit for the current 2015/16 tax year is £15,240.
4. ISAs offer huge flexibility and freedom. Investing in stocks and shares should be for the longer term – five years plus – but if you do need access to your money you can take it out at any time. This makes ISAs worth considering for many kinds of long term investing goals.
5. The investment choice is as wide as any investor could want. Any share that is listed on the UK Stock Exchange is eligible, including those listed on the Alternative Investment Market (AIM).
6. If the stock market is not for you, it is worth considering a Cash ISA. These can be transferred into a stocks and shares ISA in the future if your situation changes, and in the meantime interest is tax free. You are free to choose how you split the £15,240 limit between the cash and stocks and shares components – you can put 100% in cash if you want to – but you can only choose one provider for each of the components to subscribe to in a particular tax year.
7. For children there are also Junior ISAs where there is no access to capital or income until the child reaches 18. The maximum annual contribution is £4,080 in the current (2015/16) tax year and payments into the account are not restricted to the account holder (i.e. a parent or guardian) – family or friends can also contribute. They are an excellent way to invest for a child’s future, perhaps to provide a fund for university education or a deposit for a house.
Remember any unused allowance in a tax year doesn’t roll over. You’ll get a new allowance the next tax year, but won’t be able to contribute anything to previous years’ allowances.
Rob Morgan is a pensions and investments analyst at Charles Stanley.