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Your Money > Tax Articles > Don t underestimate...
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By Danny Cox
The single most important reason to use an ISA is that it saves you tax. The more you invest, the more tax you can save. However, this means some people assume that they need to invest a small fortune to make an ISA worthwhile. This is not the case. The tax savings start from the very first pound you invest, and in most cases it costs no more to place funds inside an ISA than to hold them outside. Therefore investors generally receive these benefits free of charge. There is a limit to how much you can shelter in ISAs, but from 6 October the ISA allowance rose for the over-50s to £10,200 each year. Everyone else can still invest up to £7,200 this tax year and the new allowance will apply to all from 6 April 2010. With most commentators forecasting tax rises after the next General Election, in our view it has never been more important to make use of your ISA allowance. Apply for your ISA online today What are the tax savings and are they worth it? On most investments you pay tax. Within an ISA you pay no capital gains tax and no further tax on the income. You do not even need to declare ISAs on your tax return, and less tax means higher returns for you. The table below shows the income tax savings. Please remember that the actual benefits will depend on the level of tax you pay and over time, tax rules might change.
Missing out on these savings could prove costly – for example, a higher rate taxpayer investing in a bond fund would save £400 each year for every £1,000 of income received. There are additional savings for the over 65s, as income from ISAs does not reduce the age-related allowance. This can save as much as £663 extra income tax each year. Capital gains tax savings Each time you sell an investment this will either generate a capital gain or loss. Each tax year you add your gains and losses together and, if you make gains of over £10,100 (this year) you pay capital gains tax at 18% on the excess. However, any investments held within an ISA are exempt from capital gains tax and gains can soon mount up, especially when markets are performing strongly. Despite the recent market volatility, if you had invested £7,000 in one of the better-performing funds when ISAs launched in April 1999, you would already be sitting on gains well in excess of your annual allowance. Even though you are probably investing for the long-term, remember it is not just when you come to finally cash in your holdings that avoiding tax on your gains becomes important. Switching from one investment to another could create a tax liability. Within an ISA, you can switch between holdings whenever you like, moving to promising new sectors or funds without the fear of capital gains tax ever becoming a problem. Remember, the figure above looks at just one years allowance. If you had invested the maximum allowed into ISAs and their forerunners, PEPs (Personal Equity Plans), you could have sheltered £161,400 from the taxman so far, and this figure does not include investment growth. This represents your own personal tax haven – a tax free portfolio where your chosen investments can grow free of tax, pay you a tax-free income, and within which you can make any changes you wish without even thinking about tax. You do not even have to declare ISAs on your tax return. When it comes to investing, I believe there really are no disadvantages to doing so within an ISA; indeed most investors should not consider investing outside an ISA until they (and their spouse) have used their full ISA allowance. Why allow the taxman access to your portfolio when you can avoid it? What next? If you have not invested in an ISA yet this tax year, there is no time like the present. The sooner you invest, the sooner you start saving tax and the more time your money will have to grow. Apply for your ISA online today. Alternatively, for more tips on how to make more of ISAs please request your FREE copy of our Investor's guide to ISAs. Danny Cox Head of Advice Hargreaves Lansdown | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
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