What is an ISA?
ISA stands for Individual Savings Account. In an effort to get us all saving as much as possible the government gives tax advantages when saving into an ISA.
There are limits set each year as to what amount you can save in an ISA and receive tax benefits.
Ordinarily if you invest in the stock market and your investment increases in value (which of course you hope it will) you would suffer capital gains tax on the increase. You would also suffer income tax if you received interest or dividends from your savings and investments.
However, if your investments are held within an ISA wrapper, there is no tax suffered- neither income tax nor capital gains tax. The one exception is that the 10% tax suffered on a dividend cannot be reclaimed.
What are ISA limits for 2013/14?
The limits for 2013/14 are £5,760 for a cash ISA or £11,520 for a stocks and shares ISA.
There is flexibility as to how you use this allowance. Overall, you can invest up to £5,760 in a cash ISA and then the balance of up to £11,520 in total in a stocks and shares ISA.
For example you may choose to invest £4,000 in a cash ISA and then £7,520 in a stocks and shares ISA, or you may chose to invest the full amount in the stocks and shares account with no amount in a cash account.
We are each given a new allowance each year. You can only have 1 cash ISA each year and 1 stock and shares ISA each year. But from the following tax year (running from 6th April in one year to 5th April in the following year) you can open up new ISAs with new providers.
An ISA is effectively the mirror image of a pension. Under the pension rules the amount paid in on a monthly basis is grossed up (e.g. the basic rate tax payer paid in £80 and it was grossed up to £100.) Then when the money is drawn 25% is tax free and then balance is taxable.
Under an ISA contribution there is no tax advantage when the money is paid in. If you want to make £100 contribution to the ISA it cost you £100. However, when you draw from the ISA the full amount is tax free.
An ISA does not have the same type of restriction as a pension as to how much you can draw and when. If you wanted to take the full amount out of your ISA savings and go on a round the world cruise there is nothing to stop you.
In an ideal world you would want to have both an ISA and a pension to take full advantage of the tax allowances. The ISA allowance is a “use it or lose it” allowance. If you don’t use your allowance this year the allowance is lost. It cannot get carried forward for any period of time, like the pension allowance.
If you would like to talk to me about taking advantage of these tax benefits please do call me on 01932 698150 or email me Mary@mary-waring.co.uk
Photo credit; Flickr/Images-Of_Money