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Take advantage of tax efficient savings
with your annual ISA allowance
Individual Savings Accounts
(ISAs) were introduced in 1999 to replace Personal Equity Plans (PEPs).
When you invest through an ISA, the income and growth are free of income
and capital gains tax and you do not have to declare an ISA on your
tax return.
An ISA is not itself
an investment, but is effectively a "wrapper" within which an underlying
investment is held.
ISAs can include one
or two components:
- Cash (bank and building society
savings accounts, National Savings)
- Stocks and shares, (unit trusts,
shares, bonds, etc)
Until 5 April 2010 you
can pay an overall total of £7000 into ISAs each tax year.
MAXI and MINI ISAs
There are two types if
ISA - Maxi and Mini. In each year you can either invest in one Maxi
ISA, which can include a mixture of cash (up to £3000) and stocks and
shares, or two Mini ISAs.
There are two types of Mini ISA - a
cash ISA, and a stocks and shares ISA. You can open each ISA with a
different ISA manager if you wish and you can invest up to £3000 in
a cash ISA and up to £4000 in a stocks and shares ISA, but you
cannot open more than one of each type in the same tax year. And you
cannot invest in both a Mini ISA and a MAXI ISA in the same tax year.
What are the benefits
of ISAs
There are several reasons
to invest within an ISA: -
- You pay no tax on any of the
income you receive. This includes dividends, interest and bonuses.
- You pay no tax on capital
gains arising on your ISA investments.
- ISAs do not have to be mentioned
on your self-assessment tax return.
- For those hovering on the
threshold between one tax band and another, investing within an ISA
could make the difference between falling into the higher rate band
or not as income from an ISA is not included by the Inland Revenue in
tax band calculations.
- For those over 65, income
received from investments held within an ISA does not erode the higher
personal tax allowance they receive.
- For higher rate tax payers,
dividends received from investments held within an ISA are not liable
to the additional 25% tax levied on the net amount of dividends received
from other investments.
What about PEPs and
PEP/ISA transfers?
PEPs, like ISAs, can
be used as a "wrapper" for a range of investments, and now have
the same tax benefits as ISAs. You can no longer take out a new PEP
which also means you can't subscribe new money to existing PEPs. However,
if you already have a PEP you can transfer the investment to another
PEP provider, or switch investments within the wrapper.
If you have accumulated
a number of PEPS and ISAs investments over the years, it is important
to review their performance regularly as:
- Your investment needs may
have changed.
- The funds that you may have
invested in may not have performed well.
Prior to 6 April 2004
dividends paid on UK company shares held within an ISA received a tax
credit of 10% - which was passed on to the investor by the plan manager.
So, for every £90 dividend the investor actually received £100.
The repayable dividend tax credit was abolished in April 2004.
New rules to simplify
ISAs will come into force in April 2008
The reforms will remove
the distinction between maxi and mini ISAs and allow transfers from
a previous year's cash ISA into a stocks and shares version.
Investors who still hold
PEPs will be able to transfer their money into an ISA wrapper, and children
with child trusts will be able to roll over their investments into an
ISA on their 18th birthday.
As well as simplifying
the rules, the reforms will also make ISAs a permanent fixture of the
savings landscape, with the government pledging that the maximum annual
investment will always be at least £7,000.
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