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ISA - The Definition

We have all been using the term ISA for so long that it is worth reminding ourselves that it stands for Individual Savings Account and they can only be held by a single named account. They were created by the UK Government to encourage the British public to save, by reducing income and capital gains tax on your investments.

For the word "account" in the dictionary, this interpretation stood out:

Account- a formal contractual relationship established to provide for regular banking or brokerage or business services.

It is important to remind ourselves of this because one of the most common statements an adviser hears is "My ISAs are rubbish". Clients need to differentiate between the ISA and the underlying investments held within the Individual Savings Account. The ISA account has no effect on the performance of the investment within it other than providing shelter from UK taxes.

The most important point for anyone with cash on deposit when considering an ISA is not whether to move some of the capital into an ISA, but what type of investment to place in your ISA.
The allowance for the 2015/16 and the 2016/17 tax year is £15,240, which may be held all in cash or all in stocks and shares. You may invest in both during one year, but your total annual contribution must not exceed the annual allowance. Care also needs to be taken when considering your ISA investments when making lump sum contributions to a stocks and shares ISA and regular contributions into a cash ISA or vice versa.

Savers should endeavour to utilise their annual ISA allowance every year to reduce the effects of tax on their savings. Over a life time this may bring considerable income tax reductions for people seeking to take an income from their ISA account.

  This may appear to be of little or no immediate benefit to non-tax payers. However, we recommend that non-tax payers should still consider whether an ISA may present a benefit in future should your income increase due to the death of a spouse or civil partner, so causing you to become a tax payer. Similarly a lump sum inheritance may also change your tax status. At this stage, it would not be possible to place all your savings into an ISA due to the annual contribution limits. The new Additional Permitted Subscription allows ISAs to be transferred to your spouse on your death; this again promotes ISA benefits for non-taxpayers. Forward planning is therefore the key to reducing any current and future potential tax bill.

Basic rate taxpayers benefit from mitigating 20% tax on interest income and 18% on capital gains within an ISA. For higher rate taxpayers this rises to 40% on interest income and 28% on capital gains. They also mitigate the additional 22.5% tax on dividend income that applies to higher rate taxpayers. For additional rate taxpayers the tax savings will be greater due to the higher rates of tax charged.

The new tax year will see changes to the way dividends are taxed. In addition to your annual personal allowance, you will also receive a £5,000 dividend allowance. Once both your personal and dividend allowance have been exceeded, dividends will be taxed at 7.5% for basic rate tax payers, rising to 32.5% [higher rates] and 38.1% [additional rate]

For those people that feel that their ISA is rubbish, we would recommend that they seek advice from a qualified investment professional, who will be able to assess whether the investments held in your ISA are still suitable.

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