Tax Tip 1. Individual Savings Accounts

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  1. TheADIGroup

    TheADIGroup
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    Individual Savings Accounts

    Use your Individual Savings Account (ISA) allowance of each year.
    For 2010/11 the limit is £10,200 (of which up to £5,100 can be
    invested in cash).
    You can invest in cash, insurance, stocks and shares, etc. up to the
    limit each year and all proceeds are free from personal taxation.
    This means that if you invest £10,000 each year for ten years then you
    will have a pot of £100,000 plus accumulated interest which is
    generating tax free returns. Over a number of years this can be a
    viable alternative to a pension fund as proceeds can be taken at any
    time and there is no requirement to wait for retirement age or to take
    an annuity.

    Individual Savings Account Example

    John invests £7,000 into shares using his ISA.
    After three years, this has grown to £14,000, and he decides to
    cash it in. He has used his annual capital gains tax allowance
    elsewhere.
    The amount of tax he pays on the gain is NIL.
    However, if he had made the investment outside an ISA,
    purchasing shares in his own name, he would pay capital gains
    tax on the gain of £7,000. If the disposal is made after 23 June
    2010 and he is a higher rate taxpayer, he would face a capital
    gains tax bill of £1960 (£7,000 @ 28%).
    These ISAs are also useful for the retention of income within the fund
    as this is received effectively tax free. This means that the fund can
    grow at a faster rate than if the funds were held outside of an ISA,
    where potentially 40% or 50% of the investment return would be
    taxed.
     

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