ISAs - The fast track to growing your wealth
Origen Private Client Adviser
A new tax year gives new ISA allowances for tax-free
Sian Kentdemonstrates the value of ISAs and how they can really save you tax and help
you get more from your savings.
The amount that
you can save in an ISA has risen by almost £5,000 over the last three tax years
making their generous tax treatment even more attractive. All gains are free of Income Tax and Capital
Gains Tax (CGT) and in a “nod” to tax simplicity, ISA income and gains don’t have
to be declared on your tax return. For the new tax year 2018/19 each UK
resident aged 18 and over has an ISA allowance of £20,000. Children under 16
also have a Junior ISA allowance of £4,260. .
What is an ISA?
An ISA, or Individual Savings Account to give it its full
name, is an approved tax wrapper for investments such as stocks and shares,
certain collective investment funds and cash.
Who wants to be a (ISA) millionaire?
TThe ISA was introduced in 1999, replacing the Personal
Equity Plan (PEP) which had been around since 1987. Although the amounts you
can contribute have been restricted (it started at £7,000 and only rose to over
£10,000 in April 2010) there are now over 1,000 ISA millionaires in the
A couple aged 40 today can become ISA millionaires by age 60
if they both contribute £14,000 into an ISA assuming 5% growth on their
investment each year.
However, if the couple make their investments outside the
ISA the income and growth will be subject to tax and they won’t reach
millionaire status until age 64. To achieve millionaire status by age 60, they
will each have to contribute £17,250.
So, the ISA got you there four years earlier and for a lower
outlay but the big difference is that the investments outside of the ISA, when
turned into cash to buy that dream retirement home, are going to attract the
attention of the tax man whereas the ISA isn’t.
At present you have a CGT tax-free allowance of £11,700 per
year and then gains are taxed at 10% for basic rate taxpayers and 20% for
higher rate and additional rate taxpayers. This means that up to 20% of your
profits could be payable as tax to HM Revenue & Customs, but within an ISA,
you get to keep every penny. In our example here, that’s a tax saving of up to
The tax free advantages of an ISA are not just on the
growth. Income generated and withdrawals from an ISA are tax free. Firstly, any
dividends paid by a non-tax friendly investment would be taxed when you receive
them. Secondly, if you want to switch
funds or cash in your investment to use the money for something else, the
proceeds could be taxed under the CGT rules.
What action can you take?
If you hold investments outside of an ISA, you should consider
transferring them into a tax efficient wrapper such as an ISA. This will enable
your fund to grow free of Income Tax but also when you choose to access the
funds, they will not be subject to CGT. Seek advice from your Origen Adviser
though as transferring other investments into an ISA may be treated as a
disposal for tax purposes.
Don’t forget that you cannot make use of any unused ISA
allowances from previous years and you could also consider using the ISA
allowances of your spouse or partner. If
you time the transfer to take place a few days apart but over two tax years say
the 2nd April and the 7th April you could shelter £80,000
from the tax man between the two of you.
Not bad for five days work!
Please note that when investing, your capital may be at
risk. The value of an investment and the income received could go down as well
as up. You may not get back what you invest.
Ask your Origen Adviser how you can use an ISA to protect your investments from tax and to get the best for your money.
This article is
intended to be for information only and should not be taken as financial
advice. Before you take any action you should seek advice to check the
suitability and tax consequences.
CA2609 Exp. 04/19
[ Date Posted: 31/05/2018 10:37:54 ]