Why we love the Isa
Nobody wants to pay more tax than they need to. But UK consumers are set to waste £4.6 billion in unnecessary tax payments in 2016, according to research by IFA search site Unbiased. co.uk and pensions provider Prudential.
That’s £159 per taxpayer and it’s partly due to people not making use of the individual savings account (Isa).
Most of us have to pay tax on our wages. But if you save cash in the bank or invest in a fund or in shares, then you could be handing over a portion of your interest or gains to the taxman too.
So stop doing this and take out an Isa.
This is a simple account where you can hold your money and keep it out of the clutches of the taxman.
Isas can be a great home for your family’s emergency money, a rainy day cash fund or holiday money. You can compare Isas with our comparison tool to find the one that suits you best.
Isas are also a great way to save over the long term – five years or more – for a deposit on a first home, a new car, university fees or a wedding fund for your child or grandchild.
But if you can put your money away for at least five years, you really should be looking at stocks and shares Isas, rather than cash Isas.
Isas are also an extremely useful way to save for retirement. This is because when you draw an income from an Isa, it is paid out tax free and doesn’t have to be declared to HMRC. So your retirement income from other sources can potentially be drawn at a lower tax rate too.
The beauty of Isas is that you can also take your money out at any time. So although you could be stashing your money away for the long term, you can still access it in an emergency – but you may pay a fee if you withdraw money early from a fixed-rate cash Isa.
Pensions are the other popular form of long-term, tax-efficient savings but they have stricter rules that mean you can’t access the money until you’re at least 55.
Isas have an annual allowance of £15,240 per person for the 2015/16 tax year ending on 5 April.
This is more than enough for most people’s needs. Using their combined allowances, couples can shelter £30,480 this year from the taxman.
But you must use your annual Isa allowance by 5 April. Any unused allowance doesn’t roll over – so if you don’t use it, you lose it. You’ll get a new £15,240 allowance for the 2016/17 tax year, but won’t be able to contribute anything to the old Isa.
Some people who have saved the maximum in an Isa every year and invested it wisely have stashed enough away to become Isa millionaires. They can draw a tax-free income from their £1 million – lucky them!
If you want to become an Isa millionaire, then you need to start saving seriously. Every millionaire started by saving his or her first £1. Just get started.
There are limits to how much you can invest in any tax year. For 2011/12, the limit is £10,680. Of that, the maximum you can invest in cash is £5,340 and the balance of £5,340 can be invested in shares (individual company shares or investment funds). If you don’t take the cash ISA allowance, you can invest up to £10,680 into a stocks and shares ISA.
Invidivual Savings Accounts were introduced on 6 April 1999 to replace personal equity plans (PEPs) and tax-exempt special savings accounts (TESSAs) with one plan that covered both stockmarket and savings products, the returns from which are tax-exempt. The ISA is not in itself an investment product. Rather, it’s a tax-free “wrapper” in which you place investments and savings up to a specified annual allowance where the returns (capital growth, dividends, interest) are tax-exempt (you don’t have to declare ISAs and their contents on your tax return). However, any dividends are taxed within the investment, and that can’t be reclaimed.
A financial adviser who is not tied to any financial services company (such as a bank or insurance company) and is authorised by the Financial Services Authority (FSA). They can advise on financial products to suit your circumstances. All IFAs have to give consumers the choice of paying by fees or commission and have to explain which would best suit the customer in that particular instance. Also, if commission is paid either by the client or the financial service provider recommended by the IFA, the IFA must disclose what that commission is.