I was recently asked by a client what sort of ISA she could have and what sort of ISA would be better for her daughter. She wanted to understand the benefits of the various options and what would be best for her. What she really wanted was tax free savings and therefore ISA’s were not the only option available to them.
I admit that I considered this an easy question, however, when I started to explain the various ISA options I realised how complicated a bit of tax efficient savings had become since the inception of ISA’s in 2011 and the ability to earn tax free interest and dividend income since 2016.
TESSA’s and PEP’s were replaced with the option of Cash and or Stocks and shares ISA’s. The ISA options have since been increased with the addition of Junior, Flexible, Inheritance, innovative, Help to Buy, Easy and Lifetime ISA’s. Wow!
To add to it there are quirks in the rules that will allow you to hold both a Junior ISA and an adult ISA at the same time, but not an adult Stocks and Shares ISA.
There are benefits above the fact that they are tax free savings, like the Lifetime ISA which was introduced to encourage first time buyers and the self-employed to save for a property or retirement. As long as you follow the rules you could get a 25% bonus. You can draw the benefits to buy your first home or to help with your retirement if aged 60. Other withdrawals could cause a 25% government charge, so you could get back less than you put in!
In addition to this you are able to earn tax free interest on deposit accounts of £1000 per year for a basic rate tax payer, £500 for higher rate tax payers and tax-free income on dividends of £2000 per tax year (reduced from £5000 in April 2018) regardless of your income tax rate. Even this has become confusing with your personal rate of income tax having an impact on the amount of tax free savings you can get.
As well as this, there is potentially up to £5000 of interest tax free, as there is a 0% rate of tax available to cover savings income of up to £5000. This rate applies to individuals on a low income who have non- savings income of up to £16,850 per annum.
All of these intricate rules are causing a great deal of confusion when it comes to making full use of your tax-free savings.
There is a call for ISA simplification, but seeing how well that went with pensions I hold out little hope.
Kristina Bailey Dip FA CeMAP
This information is provided strictly for general consideration only. No action must be taken or refrained from based on its contents alone. Accordingly, no responsibility can be assumed for any loss occasioned in connection with the content hereof and any such action or inaction. Professional advice is necessary for every case. Based upon our understanding of UK tax law at June 2018. The value of investments can fall as well as rise and you may not get back the full value of your investment