Articles
Individual Savings Accounts (ISAs)
All monies within ISAs grow free of income tax and capital gains tax so they are known as tax efficient savings schemes; the downside is there are maximums you can invest.
ISAs were introduced in 1999 and were preceded by Personal Equity Plans or PEPs and there are now two types:
Present rules state that you can invest the full £10,680 allowance into a Stocks & Shares ISA or a mixture between that and a Cash ISA, however you can't invest more than £5,340 into a Cash ISA in any one tax year and no more than £10,680 in total between the two!!
- Cash ISAs
- Stocks & Shares ISAs
Present rules state that you can invest the full £10,680 allowance into a Stocks & Shares ISA or a mixture between that and a Cash ISA, however you can't invest more than £5,340 into a Cash ISA in any one tax year and no more than £10,680 in total between the two!!
I guess people assume that stocks and shares = shocks and scares, but this need not be the case at all. Clearly a Cash ISA is a deposit based savings account with a tax wrapper meaning that you won't have any tax to pay on the proceeds.
With a normal deposit based savings account, a basic rate tax payer would pay tax at source at 20% on the gross rate of interest being offered by the particular Bank / Building Society and a higher rate tax payer would have an additional 20% tax to pay. A non-taxpayer can fill in an R85 form to ensure that the interest is paid gross.
OK, so to Stocks an Shares ISAs - why invest in them?
First point would be the fact that you would be utilising the rest of the ISA allowance that is so generously given to us each tax year by the UK government ;-)
Furthermore is the potential for higher returns than a deposit based account. There is an element of risk here, but there is the ability to invest in different funds and through portfolio management and diversification, some of the volatility can be reduced and over time the rewards may well be higher than those seen with Cash ISAs.
A quick mention now goes to inflation and I may write a separate article on this at another point in time, but essentially this is the rising cost of living - If inflation is running at 3% and you are getting 2.5% net on your savings, then inflation is eating away at the growth and in essence your money is not keeping pace with the rise in the cost of living and is actually get devalued!!
If you would like further detail, please do get in contact with us, we would be happy to go into more detail, but remember this about your ISA allowance - if you don't use it, you lose it so with it approaching the end of the Tax year, remember to maximise all of your ISA allowance.
Note that it is permissible to save into a Cash ISA from aged 16, however you must be aged at least 18 before you can invest in a Stocks & Shares ISA.
22/04/2010 00:00:00
Last updated: 22/04/2010 14:28:34
