Five reasons to invest in an ISA

The ISA season is almost here which means it’s time for savers to revisit their investments and check they are maximising tax breaks. This tax year the ISA allowance is £15,240 – and if you don’t use it before the end of the tax year, you’ll lose it. From 6^th April the new increased ISA allowance of £20,000 kicks in. Here’s a reminder why you should be saving in a stocks and shares ISA: 

1. Tax efficiency pays

Tax benefits are important. You pay no capital gains tax or income tax on investments held within an ISA, significantly increasing the amount of savings and investments you can shield from tax.  The government gives everyone an annual personal savings allowance. You can shield up to £,1000 of savings/investment income per year if you earn between £17,000 and £43,000, and £500 per year if you earn between £43,000 and £150,000 a year (if you earn less than £17,000 your savings, all your savings income is tax free).  However, if you have been a careful saver and investor, the personal savings allowance can quickly run out, which is why ISAs are such a boon.

2. Cash returns are rock bottom

With interest rates parked at 0.25% and inflation set to rise, savers need their money to work harder than ever to generate a real return. In the current environment, keeping your money in cash can result in very limited returns. Calculations by Fidelity show that if you had invested £15,000 into the average UK savings account 20 years ago, you would now be left with a paltry £19,916. If however, you had invested £15,000 into the FTSE All Share over the same period you would now be left with £52,965. That’s a difference of £33,049 – too big for anyone to ignore.

3. Dividend allowance cut in the budget

The Chancellor this week announced a cut in the dividend tax-free allowance from £5,000 a year to £2,000 a year. This will mean a tax rise for those who receive dividend income, and may pull some back into self-assessment. By maximising ISAs for investments you can avoid paying more tax than you need to.

If you own funds outside an Isa you can move them inside an Isa wrapper. If you own shares directly, however, there’s a different process. Savers are not allowed, under current Isa rules, to simply transfer existing holdings directly into the tax wrapper. The shares need to be sold and bought back again, via an ISA. The process has a rather quirky name, known as ‘bed and Isa’. Be aware you might incur a capital gains charge for doing so.

4. ISAs are flexible

ISAs were deliberately designed to make them simple and flexible which means they can be sold and cash returned to you quickly if you need to access the money. You can also use an ISA to buy and sell a wide range of permitted investments including UK and overseas shares, funds and bonds.

A new Innovative Finance ISA allows you to place peer-to-peer investments inside the tax-free ISA wrapper.

5. You don’t need a large lump sum to invest

You don’t need to have thousands of pounds in the bank to earn returns tax free. Most stocks and shares ISA providers will accept monthly contributions starting from around £25.

What’s not to like?

To find out more about the different types of ISAs available, see our handy ISA guide here.

Article is accurate at date of writing.