Time running out to take advantage of ISA allowance

Time is running out fast if you want to invest in an Individual Savings Account (ISA) in the current tax year but haven't got round to it yet.

Anyone wishing to use their allowance of £15,240 has to meet a deadline of midnight on Wednesday, April 5 – the end of the 2016-17 tax year.

It is a ‘use it or lose it’ allowance, meaning that if you don’t use all or part of it in one tax year you can't take that allowance over to the next year.

An ISA is a tax-efficient investment wrapper in which you can hold a range of investments, including bonds, equities, property, multi-asset funds and even cash, giving you control over where your money is invested tax-efficiently.

ISAs are becoming an integral part of financial planning. However, it is important to remember that an ISA is just a way of sheltering your money from tax – it’s not an investment in its own right.

Benefits

They offer a unique range of benefits, as there is no Income Tax on interest payments (which are made by bond funds) or dividends (which are paid by equity funds), and you don’t lock your money away, so you can still access it whenever you need to.

Income from an ISA doesn’t affect your personal allowance or age-related allowance, and there’s no Capital Gains Tax (CGT) payable on any growth you may achieve. This means you could use withdrawals to increase your income when necessary. However, any losses made in the ISA cannot be used to offset gains made elsewhere.

When you invest through an ISA, you don’t have to pay personal Income Tax on any interest you receive from your investments. In a Stocks & Shares ISA, many investors choose bond funds generating interest because they offer the potential for a regular lower-risk income compared with equities. 

This feature of an ISA is particularly useful in retirement, as it means you can hold your money in bond funds and generate a tax-efficient income on top of the payments you receive from your pension. It is also very beneficial if you want to generate long-term capital growth from your funds, but prefer to take a cautious approach to investing.

When your investments are held in ISAs, no CGT on growth may seem like a minimal benefit if your profits are well within the threshold for CGT, but it’s worth remembering that stocks and shares investments are for the long term. If your funds perform particularly well for several years, holding them in ISAs will mean you have full access to your money at all times without having to worry about managing a potential tax burden.

You don’t have to declare any investments held in ISAs on your tax return. This may not seem like much but, if you have to file an annual tax return, you’ll know that any way of simplifying your financial administration can be very helpful.

Free to transfer

If you feel that your existing ISA provider is no longer appropriate for your needs or you are looking to consolidate your investments under one roof, with an ISA you are free to transfer your investment between providers to suit your individual needs. 

Please note that your current provider may apply a charge when you transfer your investment. Also, while your investment is being transferred, it will be out of the market for a short period of time and will not lose or gain in value.

This article is the first part of a guide to ISAs. The second will appear next week.