5 good reasons to use your ISA allowance
With the end of the tax year only a month away, making sure you use your ISA allowance should be a top priority. But if you are wondering why you need to consider your ISA options or what all the fuss is about, we offer you a helping hand by giving you 5 good reasons to use you ISA allowance.
The allowance is waiting…
At the start of each financial year, HMRC set a limit on the amount each individual can put into an ISA over the course of the next twelve months – known as the ISA allowance. You can either invest your full allowance in an Investment ISA (sometimes called a Stocks and Shares ISA), or put up to half in a Cash ISA and the rest in an Investment ISA. This year’s allowance is £11,520, which means you can put up to £5,760 into a Cash ISA.
But why should you use your ISA allowance? The current economic climate is seeing record low savings rates and so Cash ISA savers might not have seen anything that appeals, or perhaps you feel like it’s not really relevant to you because you already have a different type of savings or investment plan. To this end our Head of Savings and Investment, Oliver Roylance-Smith, gives you 5 reasons why you should consider using your ISA allowance and use it now.
1. You don’t pay tax on any income or growth
Any interest received or capital gains made are not then subject to tax, whether held in a Cash ISA or an Investment ISA, and there’s no need to declare it on your tax return. If you’re a higher rate taxpayer this means that you get to keep hold of 40% more of your hard-earned cash than you would in a non-ISA savings account. Based on £10,000 receiving a 5% annual return, this is the difference between receiving £500 within an ISA or £300 outside of an ISA (or £500 versus £400 for a basic rate taxpayer). Why let the tax man take away money that you could otherwise keep?
2. There are a wide range of options available
Don’t think that ISAs have a limited choice to offer. Nearly all of the savings plans and investments that we offer can be held within an ISA, so both savers and investors will have a number of options to choose from, whether you are new to ISAs or more experienced. Even if fixed rate Cash ISAs are not looking that appealing, there are always alternatives to consider as well the option of using your Investment ISA allowance. This also means that making the right selection can make a big difference. Taking time to review all of the options available rather than simply taking your bank’s latest offering, can be time well spent.
3. You can transfer existing ISAs
Many of us already have existing ISAs, opened in previous tax years in order to protect our capital and any growth from the tax man. However, like so many other savers and investors, you may find that your ISA is no longer paying a competitive rate – this is where the ISA transfer can help. Nearly all Cash ISAs and Investment ISAs permit you to transfer existing ISAs to them without charge, although don’t forget to check whether there are any penalties from your existing provider. Remember that Investment ISAs also accept transfers from Cash ISAs although once you have transferred you cannot switch back to a Cash ISA in the future. Don’t waste the valuable tax efficiency of an ISA by keeping it in a low paying savings plan or poorly performing investment. There is a wide choice available.
4. Low savings rates means you need all the help you can get
The impact of record low interest rates has been particularly hard on savers, with many fixed rate savers facing falls of up to 50% in the returns available from current plans with the same term. This has also forced many savers to consider investing in order to try and counter the impact of low savings rates. But whether you choose a Cash ISA, an Investment ISA or both, each provides your capital and any interest or growth with shelter from the tax man, helping to maximise the return you receive in your pocket.
5. Think of the future
Even if fixed rates on Cash ISAs are making you think twice, remember that this is unlikely to be the case indefinitely. Using your ISA allowance each tax year has the benefit of building up a lump sum that is protected from the tax man for future years, subject to the tax rules remaining unchanged. The compound effect of not paying tax increases more and more over time and since you can transfer from plan to plan, the ability to find a competitive deal is always available.
If you had invested the maximum into a Cash ISA since the turn of the millennium and it had grown at 5% per year, you would have a pot approaching £80,000 whilst putting the maximum into an Investment ISA that had grown at 7% each year would see a lump sum of over £195,000. Therefore maximising both the amount held in ISAs as well as the returns you receive will help you plan for future years.
If you don’t use it, you’ll lose it
Importantly, you can’t roll over ISA allowances from year to year, hence the phrase ‘use it or lose’. You therefore have until 5th April 2014 to put money in, no exceptions. As soon as the new tax year starts on 6th April 2014 you will have a new allowance – which in 2014/15 will be £11,880 – a rise of £360 or 3.1% on the previous year. Of this, £5,940 can be placed in a Cash ISA.
You don’t have to wait – act now before it’s too late
The current ISA allowance is available now and many of the savings accounts and investments available through Fair Investment Company will also accept dual ISA applications – this means you can cover this year’s ISA allowance and your full ISA allowance for the next tax year all in one go. You can also transfer any existing ISAs at the same time so there’s no excuse for missing out on this valuable tax break – what are you waiting for?
Please note that this information is based on current law and practice which is subject to change.
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No news, feature article or comment should be seen as a personal recommendation to invest. Prior to making any decision to invest, you should ensure that you are familiar with the risks associated with a particular investment. If you are at all unsure of the suitability of a particular investment, both in respect of its objectives and its risk profile, you should seek independent financial advice.
Tax treatment depends on your individual circumstances and is based on current law which may be subject to change in the future. Always remember to check whether any charges apply before transferring an ISA.