A FISTFUL OF ISAS!

11th May 2016

It is unlikely to have escaped your notice that there is an ever increasing array of ISA products available for investors to shelter funds tax efficiently; each has its own idiosyncrasies so here’s a brief summary.160509 Fistfull

What is an ISA?

ISA stands for Individual Savings Account which is essentially a flexible tax-free investment wrapper with an annual subscription limit. Across all their ISAs, investors are able to contribute up to £15,240 in the 2016/17 tax year, and £20,000 from April 2017.

Cash ISA

A new Personal Savings Allowance (PSA) was introduced from 6th April 2016 which means basic rate tax payers can receive up to £1,000 of savings interest free of tax in any one tax year. This falls to £500 for higher rate taxpayers, and does not apply to savings income received by additional rate tax payers.

If you expect your savings interest to exceed the PSA a Cash ISA may provide a suitable home for your long-term cash holdings because it offers an effective combination of tax efficiency, flexibility and access to capital.

Stocks and Shares ISA

Returns made on investments held in a Stocks and Shares ISA are tax free; you do not pay income or capital gains tax on interest received or profits made.  They are also exempt from the new dividend taxation that was introduced in April 2016.

Stocks and shares ISAs can include:

  • shares in companies
  • unit trusts and investment funds
  • corporate bonds
  • government bonds
Innovative Finance ISA

This is a new ISA which will make it possible to invest through peer-to-peer platforms within an ISA wrapper.  As an investor, you will be lending out your money to borrowers who can be individuals or businesses that will (hopefully) pay the money back over time, with added interest.

Flexible ISA

ISA providers now have the option of including a facility that will allow savers to replace funds they have withdrawn from their ISA earlier in a tax-year, without this replacement counting towards the limit on how much they can save in an ISA for that year.  If the withdrawal is paid back into the ISA in the next year it will count towards the new year’s annual allowance.  Not all ISA providers will offer this facility.

Junior ISA

There are 2 types of Junior ISA:

  • a cash Junior ISA
  • a stocks and shares Junior ISA

Your child can have one or both types of Junior ISA provided they are under 18 and live in the UK.

In the 2016 to 2017 tax year, the savings limit for Junior ISAs is £4,080.

The child can take control of the account when they’re 16, but can’t withdraw the money until they turn 18.  You will find further details here.

Help to Buy ISA

If you’re a first time buyer, you can save up to £1,000 as an initial deposit followed by up to £200 a month towards your first home and the government will boost your savings by 25%. You can receive a bonus of up to £3,000 which will be paid when you buy your first home.  Accounts are limited to one per person rather than one per home so those buying together can both receive a bonus.  Here are further details.

Lifetime ISA

From April 2017 these ISA accounts will be available for those aged 18 – 40 to open.  Any contributions you make before your 50th birthday will receive a bonus of 25% from the government but contributions cannot exceed £4,000 a year.

Your savings and the bonus can be used towards a deposit on a first home worth up to £450,000.  Accounts are limited to one per person rather than one per home – so two first time buyers can both receive a bonus when buying a home together.  If you have a Help to Buy ISA you can transfer those savings into the Lifetime ISA in 2017, or continue saving into both – but you will only be able to use the bonus from one to buy a house.

Alternatively you can use it to save towards your retirement because after your 60th birthday you can take out all the savings tax-free.  You can withdraw the money at any time before you turn 60, but you will lose the government bonus (and any interest or growth on this) and you will also have to pay a 5% charge. More information is available here.

Which ISA is right for me?

The first of our six guiding principles for investment is that “Investment decisions should only be made in the context of a Financial Plan…”  The decision about which is the correct ISA, or combination of ISAs, will depend on your own circumstances and objectives.

Please contact us if you would like to find out whether Fortitude can help you to create your own Financial Plan.