Arguably the most well-known vehicle for tax-free savings is the Individual Savings Account (ISA). ISAs have been around since 1999 and can be used to save cash or to invest in stocks and shares.
What Can Be Invested?
The amount that can be invested in an ISA is subject to a limit for each tax year. For 2010/11 the overall limit is £10,200 of which up £5,100 (50% of the overall limit) can be invested in a cash ISA, with the balance in stocks and shares.
From 6 April 2011, the overall limit increases to £10,680 of which up to £5,340 can be invested in a cash ISA, again with the balance in stocks and shares. There is no requirement to have a cash ISA and if preferred the whole limit can be invested in stocks and shares. Likewise, a saver can invest only in a cash ISA, subject of course to the cash ISA investment limit.
The limits apply for each tax year and any unused amount is lost at the end of the tax year. There is no carry forward facility.
What About Tax?
Interest paid on cash invested in a cash ISA is tax-free and does not need to be declared on the self-assessment tax return. Likewise, where shares or funds are invested in an ISA, capital growth is free of Capital Gains Tax (CGT) and there is no tax to pay on any dividends received on ISA investments.
Examples(1) Henry invests in a cash-only ISA. He can invest up to £5,100 in 2010/11 and up to £5,340 in 2011/12. Interest paid is tax-free.
(2) Ruby wants to invest in both a stocks and shares and a cash ISA. She has £4,000 to invest in a cash ISA in 2010/11. She can invest up to £6,200 in a stocks and shares ISA.
Savers wishing to maximise the opportunities for tax-free investment should make the most of the limits. Where the maximum investment for 2010/11 has not already been made, savers have until 5 April 2011 to make further investments up to the limit.
New limits apply from 6 April 2011 for the 2011/12 tax year and the full amount for the year can be invested on 6 April 2011 to maximise the opportunity for tax-free returns.
The tax saved will depend on the taxpayer’s marginal rate of tax and whether income is received in the form of interest or dividends. For example, a 40%taxpayer would save tax of 40% on any interest received and 32.5% on any dividend income. These are savings worth having.
The opportunity to invest in an ISA is open to anyone who is UK resident, 16 or over as regards a cash ISA or 18 or over as regards a stocks and shares ISA. This is an opportunity that should not be overlooked.
By Sarah Bradford