Why is everyone talking about ISA Allowances?
Before we go into the detail of ISA allowances, it is important to understand why and how we pay tax. Our tax payments are what the government live off - it is their income. Governments will tweak tax laws to benefit them in the long run - or to prevent a bad behaviour we have. In other words, taxes are a form of ‘nudge’ towards certain behaviours (e.g. saving for your future in a pension so you don’t rely on the government benefits) and away from others (e.g. alcohol and tobacco).
So now we’re clear on the WHY, let’s look at the HOW. The government gives all UK earners a ‘personal allowance’ - this is basically an amount of money you can earn that you pay NO tax on. Anything above this amount and you’ll pay tax at the band rates of 20%/40%/ 45% depending on how much you earn.
Say you take some of the net money that lands in your bank account to invest it in Apple shares. You pay £100 per share. You can pay tax in two ways by investing:-
(i) Income tax on dividend income - any dividends that Apple decide to pay their shareholders (including you!) will be liable to tax.
(ii) Capital gains tax on the capital gain - when you decide to sell you may have to pay capital gains tax on the ‘gain’ you made. Say you sell it for £200, you just made a gain of £100 (£200-£100).
HOWEVER - here is the juicy bit - if you invest via an ISA you are liable to NONE of these taxes so NO income tax on your dividends and NO capital gains tax! And THAT my friends, is the reason we LOVE ISAs.
ISA stands for Individual savings allowance - it is the amount of money the government allows you to save/invest TAX FREE!
There are several types of ISA but they fall under two broad categories:-
(i) ISAs invested
(ii) ISAs sitting in cash (Cash ISA)
and I bet you know which one is my favourite! YES! Any ISA that is invested! Cash ISAs are a waste of your annual ISA allowance of £20,000 as anyway, you won’t pay any income tax on the interest unless you’re earning over £1000 in interest!! and trust me, with the interest rates as low as now, you’ll have to have A LOT of cash sitting in the bank to hit that amount.
Therefore, ISAs that are invested are a personal favourite! I own a Stocks and Shares ISA, a Help to Buy ISA and a Lifetime ISA. All have different purposes, the Stocks and Shares ISA is for investing, the Help to Buy ISA is for a first time property and a Lifetime ISA is for a property OR retirement as you can access your money at 60.
The £20,000 allowance expires if you don’t use it within the tax year (which runs from 6th April to 5th April each year!)
So for 2020/2021 tax year - the ISA allowance expires on the 5th April 2021!! so very very soon!
Get involved and don’t let your ISA allowance go to waste :D