Stocks And Shares ISAs
A stocks and shares ISA enables you to invest your money in the stock market, rather than simply saving it.
You can invest up to £15,240 in a stocks and shares ISA for the 2016/17 tax year, which runs from 6 April 2016 to 5 April 2017. The limit will then rise to £20,000 in 2017/18.
You can put your money into the shares of any company listed on a ‘recognised stock exchange’, or into pretty much any fund run from the UK. A recognised stock exchange means most major markets, such the London or New York Stock Exchanges. A recent-ish rule change, made in 2013, means that you can put AIM shares into an ISA as well.
Once your investment is safely sheltered within a share ISA, it will be protected from both income tax and capital gains tax (CGT).
Outside of an ISA you don’t pay any tax on dividends if you are a standard-rate taxpayer so there’s no income tax advantage in holding them within an ISA. However, higher rate taxpayers enjoy a tax benefit, as they don’t have to pay any additional tax on their dividends, as they would do if the shares were held outside of an ISA.
For example, if a higher-rate taxpayer were to receive £100 of dividends on investments held outside of an ISA, they would have to pay additional tax of £25.
One further issue to think about is that, if you are a basic rate taxpayer now, but suspect you might be a higher rate taxpayer in subsequent years, using an ISA could save you income tax in future, even though you won’t get any immediate benefit.
Note that the rules regarding the taxation are being given a major overhaul from 6 April 2016 onwards. The first £5,000 of dividend income will be free of tax. Amounts above this will be taxed at 7.5% for basic-rate taxpayers, 32.5% for higher-rate taxpayers and 38.1% for additional-rate taxpayers.
These changes will mean that the tax protection offered by ISAs will become more important for those with larger portfolios. Those with smaller portfolios, who earn less than £5,000 in dividends each year, may still want to look at ISAs, though, as they might provide protection from tax in the years to come.
Capital Gains Tax
The main tax benefit that share ISAs offer is protection from Capital Gains Tax (CGT).
If you make a small one-off investment in an ISA then it is unlikely that you will ever save much in the way of CGT, as you are allowed to make a certain amount of capital gains each year before you have to pay anything (the limit is £11,100 for 2016/17). However, especially now the rate of capital gains has increased to 28% for higher earners, using ISAs year after year could help you avoid a substantial CGT bill further down the line.
In the case of funds, there are often no additional charges to pay by sheltering your investments within an ISA, so you are often getting your tax protection at no additional cost. If you are investing in individual shares you may have some additional charges to pay for using an ISA. However, these are often capped and you can bundle together several years’ worth of ISAs together in one account.
Note that there is one tax you can’t escape, even within an ISA. This is stamp duty, which is payable when you purchase most shares (apart from those listed on AIM) and funds. It is charged at 0.5%. There is no stamp duty to pay when you sell.
Make the most of your ISA
- Whether you’re investing for a rainy day, the chance of a better return, or bit of each, it makes sense to do so tax-efficiently. The Motley Fool Shares ISA, powered by Interactive Investor, helps you do just that.
- And with a simple quarterly fee that doesn’t take go up the more successfully you invest, it could be just the thing.
This is an execution-only service and does not give investment advice. Of course, investing is not without risk: share prices go down as well as up and you may get back less than you invest. How the tax treatment advantages might benefit you will depend on your circumstances – and the tax man might change the rules in the future. If in any doubt as to whether a Shares ISA is right for you, please seek advice.