Time to take control over where your money is invested tax-efficiently

Each tax year, we are each given an annual Individual Savings Account (ISA) allowance. The ISA limit for 2016/17 is £15,240, rising to £20,000 in 2017/18. Anyone wishing to utilise their allowance should do so before the deadline at midnight on Wednesday 5 April 2017. The date marks 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 cannot 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.

Sheltering your money from tax

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.

ISAs 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.

Withdrawals to increase your income

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, interest is generated by bond funds, which many investors choose because they offer the potential for a regular, lower-risk income, compared with equities.

Particularly useful in retirement

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, you don’t have to pay any CGT on the growth. Of course, this may seem like a minimal benefit if your profits are well within the current £11,100 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.

Simplifying your financial administration

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.

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

Withdrawals from an ISA are tax-efficient

ISAs can give you control over your retirement income, as you can take as much money out as you like, whenever you want. Savings in an ISA and withdrawals from an ISA are tax-free. If you are a pension saver, you can generally also take out as much money as you like, whenever you want, from age 55. However, at present only up to 25% of the pension can be withdrawn tax-efficiently, with withdrawals taxed at the applicable marginal rate of Income Tax. Separately, a test against the Lifetime Allowance may also be applied, which could result in additional tax becoming payable.