Saving tax efficiently. Why wouldn’t you?
If you’ve managed to put away some savings during the pandemic, you may wish to consider investing them tax efficiently.
While the way we live and work has changed dramatically since the onset of COVID-19, some things have fortunately stayed the same. When it comes to savings for example, we believe, ISAs continue to be one of the most tax-efficient ways to help you realise your financial goals.
There are different types of ISAs from which to choose. But with interest rates at historic lows – and cash earning virtually no interest on your savings – you may wish to consider opting for a stocks and shares* ISA.
Don’t forget though that while stocks and shares ISAs offer the possibility of higher potential returns than cash, the risks you are taking by investing in the stock market are higher too and you may not get back your original investment.
Why are ISAs tax efficient?
• You may have heard of the term ‘tax wrapper’ before. The wrapper effectively protects the underlying funds in which your ISA is invested
• So, you don’t have to pay any capital gains tax on any profits you might make from the rise in company share prices within your underlying funds
• Nor do you pay any tax on interest earned from any government bonds (effectively IOUs for which the lender receives a fixed amount of interest from the government over a period of time) in which you may invest
• And any dividends you may receive from companies are free from tax too
Because they’re so tax efficient, the government limits how much you can save in any one tax year but the ISA allowance for the current tax year 2020/21 is £20,000.
A date for your diary – 05 April 2021
Sadly, while your calendar may be looking decidedly empty now, here’s a deadline to remember. You must invest your ISA allowance by 5 April – the end of the tax year. As you can’t carry any remaining allowance forward into the next tax year (which runs from 06 April 2021 to 05 April 2022) you’ll lose any unused allowances. With each new tax year, however, your ISA allowance is renewed.
The Junior ISA (JISA)
The kids will thank you … eventually. Given the current cost of university fees and housing, you may want to start building a nest egg for them sooner rather than later. In terms of tax-free saving, the JISA works along the same lines as the ISA with the key exceptions:
• The allowance is £9,000 for the current 2020/21 tax year
• The money is locked away until your child turns 18
• Only parents or guardians can open a JISA (although grandparents and friends can generously pay into them)
Lastly, don’t forget
• You can only open one stocks and shares ISA in each tax year
• And you can only pay into one ISA each tax year
Happy tax-efficient investing!
*Please remember the value of your investment and any income from it may fall as well as rise and is not guaranteed. You may get back less than you invest. Recommended investment period: medium to long term, ideally five years or more.
It’s important to remember that the way the government treats tax on ISAs may change in the future. The value of the tax advantage depends on your individual circumstances.