As we begin the new year, the countdown to the end of the tax year begins. If you haven’t done so already now is the time to start thinking about using your ISA allowance for the 2021/22 tax year before it is lost forever.
What is an ISA?
Individual Savings Accounts (ISAs) were introduced in 1999 and are tax-free savings or investment accounts that allow you to maximise the potential returns on your money, as all savings are exempt from income tax, tax on dividends and capital gains tax.
The annual allowance for this tax year is £20,000 and the deadline to make use of your allowance is 5th April 2022.
Who should invest in an ISA?
An individual over the age of 18 who is UK resident for tax purposes can open a cash or Stocks and Shares ISA. Children between 16 and 18 can also open an adult cash ISA.
UK resident individuals are entitled to a Personal Savings Allowance (PSA), which enables a certain amount of interest to be earned tax-free depending on their marginal rate of tax. For basic rate taxpayers the PSA is £1,000 and for higher rate taxpayers it is £500. Additional rate taxpayers do not have a PSA.
ISAs could therefore provide tax advantages for higher and additional rate taxpayers due to their income and capital gains tax-free status, whereby any interest dividends and capital gains within the ISA are not subject to UK tax. ISAs could also be beneficial for basic rate taxpayers who hold substantial cash holdings where interest per annum is over their PSA threshold.
Types of ISA
There are four different types of ISAs available*:
Cash
These are usually through a bank or building society savings account.
Stocks & Shares
These are in the form of either individual shares or bonds, or pooled investments such as open-ended investment funds, investment trusts or life assurance investments.
Innovative Finance (IF-ISA)
These are in the form of loans made through peer-to-peer (P2P) platforms. These are higher risk investments and are recommended for experienced investors only.
Lifetime (LISA)
These are for those aged between 18 and 40 to help save up for their first home or retirement.
* Investors are able, if eligible, to open one cash ISA, one stocks and shares ISA, one innovative finance ISA and one lifetime ISA each tax year. However, the amount of new money paid into all ISAs held by an investor, must not exceed the overall ISA contribution limit for the relevant tax year. (Note, the lifetime ISA has its own annual limit of £4,000 per tax year, which is included within the overall annual ISA limit for the relevant tax year).
In addition, Junior ISAs are available which have their own set of rules.
Is a Stocks & Shares ISA for me?
Although Stocks and Shares ISAs carry the risk of you not getting your original investment back, as with all investing, they can offer considerably higher returns over time if you take a longer-term view.
Remember, even though a cash ISA may seem a ‘safe’ option, with low cash interest rates at the moment, you do risk eroding the value of your savings if the growth doesn’t keep up with inflation.
If you would like to discuss how we can help with your saving goals, in keeping with both your attitude to investment risk and tolerance to loss, please contact your usual MWM contact.
Disclaimer:
The information provided is for general information only and is not intended to address the particular requirements of an individual or business. It does not constitute any form of advice or recommendation by Menzies Wealth Management Ltd and should not be relied upon by individuals in either making or refraining from making any financial decisions. Where necessary, you should seek appropriate professional advice before acting on any of the information provided.
Menzies Wealth Management is authorised and regulated by the Financial Conduct Authority (486548). Registered address: 1st Floor, Midas House, 62 Goldsworth Road, Woking, GU21 6LQ Registered in England and Wales 06597008.
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