The humble ISA can be more than just a simple savings account. With taxation changes imminent, it could be your new flexible friend.
Are you saving to buy your first home?
Getting on the property ladder can feel like hard work when you’re a first time buyer, but if you save via the new Help-To-Buy ISA, which became available on 1 December 2015, you’ll get welcome Government boost. When you use your balance towards paying the deposit on your first residential property purchase, the Government will add 25%. Apart from the bonus, it’s just like a normal ISA that will grow free of tax.
Do you receive dividends?
From April, the taxation on dividend payments is changing. All individuals will be entitled to receive £5,000 of income from dividends each tax year free from tax. Any amount in excess of this will be taxed at a rate dependent upon your tax band, so if you receive dividends as part of a remuneration package, it would be wise to discuss your options first with your tax adviser.
If you receive dividend payments, or accrue them within investments or a share portfolio, you too will only be entitled to receive the first £5,000 free of tax, unless the shares are held inside an ISA or a pension as these are exempt arrangements.
Will you exceed the Personal Savings Allowance?
April also sees the introduction of the new Personal Savings Allowance which allows you to earn interest on your savings free of tax. Previously tax was deducted from bank and building society accounts automatically, but now, if you are a basic rate tax payer, you can earn interest up to £1,000 and higher rate tax payers can earn up to £500 without paying tax. If the interest on your savings balances go above your allowance, tax will become due unless the interest is accrued in an ISA arrangement.
Tax free withdrawals
The maximum you can put into an ISA is £15,240 before 5 April and the same again on 6 April. If you’ve not used one year’s allowance, then you can’t carry it forward. From April, if you hold a Cash ISA then the rules have been reformed so that you can also take your money out and put it back in within the same tax year without losing your ISA tax benefits.
Many retirees are utilising ISA savings to supplement their retirement income, as withdrawals taken from an ISA are free of tax, in comparison to those taken from a pension which are taxed as earned income.
You should also be mindful where the ISA proceeds go if you do not spend them, as transferring the money from an untaxed environment to one where tax is payable could be counter-productive.
Making use of your ISA allowance is possibly the simplest way to shelter your investments tax efficiently, but you should review all your financial arrangements with an independent financial adviser in order to maximise all other available tax breaks and exemptions, particularly as part of a review of an investment portfolio.
Armstrong Watson Financial Planning is an independent financial adviser and has Financial Planning Consultants across our 15 office locations. We can work alongside your tax adviser to ensure that your investments work in tandem with your personal or business strategies. Contact us to discuss your requirements and organise a review on: 0808 144 5575 or email us: help@armstrongwatson.co.uk.
