5 and a half reasons to use your ISA allowance before April 5th 2011This is not intended to be a political statement. As with all my blog posts professionally I remain neutral. Of course I have a personal political point of view but that has no place here.But have you, like me, noticed that the Government is getting better at taking our money off us?
With taxes rising and inflation eating into the purchasing power of our salaries and savings there has never been a better time to take advantage of one the easiest and arguably most generous tax break of all – investing in an ISA (Individual Savings Account)
Still not convinced?
Here are 5 reasons to use your ISA before April 5th this year:
1. Avoid Higher TaxesMore and more of us are being caught in the higher taxation net. No matter what individual tax seems to go down, the overall tax burden is continuing to rise. The so-called ‘tax freedom day’ when we stop contributing to Govt coffers and start to keep our own money (see
http://greenfinancial.blogspot.com/2010_12_01_archive.html) is getting later and later in the year – This year it is May 30th.
The Government’s stated desire to take increasing numbers out of the tax system altogether by raising the personal allowance (They are aiming for the first £10,000 everyone earns to be tax free) has come at a price. It is being paid for by those who would have been at the top end of the basic rate tax band but have now tipped into the ranks of the “higher paid” (even if bringing up a family on £40,000 or so doesn’t exactly feel like the high life!).
For those fortunate or hard working enough to earn over £100,000 the personal allowance is progressively taken away until at about £113,000 there is no personal allowance at all. So if you earn over £150,000 half of your earnings go straight to the government. All earners are about to pay another 1% a year on National Insurance (surely now just income tax by any another name!). I could go on
2. Save More Tax Free
The ISA tax break is actually getting better.
Having been increased to £10,200 last year, the annual allowance is due to rise by the rate of inflation in April to £10,680. That means that a couple can put aside more than £21,000 a year between them completely free of further income tax and with no capital gains tax to pay - ever. Mixing both cash based and shares based ISAs means that for most people the ISA allowance, coupled with the £50,000 a year that they can put in their pension each year, means they don’t need to worry so much about tax on any of their short, medium and long-term savings.
3. Use It or Lose It
If you choose not to take advantage of it by 5 April you can’t roll it over into the next tax year. Many people have built up really sizeable pots over time – At Green Financial with have many clients with six figure plus ISAs
We have many more clients with far more modest amounts gradually accruing via the discipline of regular monthly savings. But if you miss the opportunity there is no going back.
4. Flexibility
Sure, Pensions are great, they have their place in long term saving and the upfront benefit of tax relief on contributions is especially attractive to higher rate taxpayers (and even more so to those paying the top rate of 50% income tax). But there is a price to pay for the tax relief uplift and it is that your money is locked away until at least the age of 55 … and even then there are restrictions on what you can do with your money … and you pay tax on the income you earn from your pension pot. With an ISA there’s no upfront benefit but there is also no additional tax to pay ever again … and there’s no restriction on when and how much money you can take out of an ISA. For some this freedom is the difference between starting to save and not. ISAs are flexible in other ways too. You can shelter most forms of savings and investments in an ISA. With some limitations, you can mix and match cash and stocks and shares and funds (including property funds) within the ISA tax wrapper. If you don’t know where you want to put your money and are still deciding whether to go the ‘DIY’ route or to seek fee based professional independent financial advice then a ‘cash park’ type ISA could be a good stopping off point while you make up your mind.
5. Avoid CGT
Some people say that ISAs are not really all they are cracked up to be, especially for basic rate taxpayers. It is true that most people never exceed the £10,000 or so of CGT (capital gains tax) we are all allowed to incur each tax year before we are liable for tax. But you only need to accumulate a £100,000 pot for a 10% annual return to tip you into tax-paying territory. Steady saving and a tail-wind from the market could easily get you there but if you have not bothered with the ISA tax wrapper in years past you cannot rewind the clock later on. When CGT was just 18% that might not have seemed such a problem but at 28% it is much more of a consideration and who knows where it might go in future.
5.5 And finally … One of the best things about the use it or lose it ISA allowance is the way that around this time of year (often referred to as ‘ISA season’) it forces us to be disciplined about saving over time. The astute investor can, over time, benefit from the phenomenon known as ‘pound cost averaging’ – see
http://greenfinancial.blogspot.com/2011/02/pound-cost-averaging.html)
Whether month by month or viewed as year by year, what this means is that we are obliged to invest in the market in all phases of the investment cycle and so we benefit from buying when markets are depressed and when, left to our own devices, we might shy away from committing ourselves.
So there we have it, five and a half reasons to use your ISA allowance before April 5th 2011.
The required small print: Please don’t take this article as personal or specific financial advice. It is intended to be guidance only. The value of any tax break will depend on your personal circumstances. Tax and the associated laws are subject to almost constant change. This is correct as at the time of writing. E&OE. If you are in any doubt as to whether this information is of benefit to you please seek independent financial advice, ideally fee based. Please remember if you invest in stocks and shares the value of your investment can go up as well as down. Other elements such as currency exchange fluctuations could affect the value of your investment. If you have property based investments you may not be able to sell when you wish to realise your funds. Past performance is no guarantee of future returns. If you invest in cash based investments inflation may erode the purchasing power of your savings.
