MONEY COMMENT
Save Our ISA Tax Credits

By Jane Mack (TMFJane)
March 18, 2003

In a year's time, the Chancellor of the Exchequer plans to remove the 10% tax credit on dividends that can currently be reclaimed by ISA managers.

It's not a good move. There are two main reasons for investing in equities within an ISA; one is that there is no Capital Gains Tax to pay on capital growth and the other is the income from dividends which, for standard rate taxpayers, currently has the added bonus of the 10% tax credit.

Most of us don't really enjoy the sort of profits that would incur a huge CGT bill particularly as our annual exemption of £7,700 is usually enough to offset any gains. So that leaves the other main reason for investing in an ISA.

For people who invest for income, the extra benefit of the 10% tax credit is rather important as it increases the amount of the dividend you receive.

At the moment if a unit trust declares a net dividend of £100, an ISA investor would receive a tax credit of £11.11 (one ninth of £100 is £11.11), making a total pay out of £111.11.

So, if the tax credit is abolished in April 2004, it's quite possible that there won't be any real incentive for standard rate taxpayers to invest within an ISA.

In fact, according to a survey carried out last month by ISIS Asset Management, one of the largest fund management companies in the UK, 45% of investors said they would be less likely to invest in an ISA if the tax credit was removed.

Only higher rate tax payers and those with enough invested to take advantage of the CGT shelter will benefit from using an ISA – which is ironic considering the whole purpose of them was to encourage everyone to save, particularly people with modest income streams.

Let's hope the Chancellor realises the irony of it and announces in his budget on 9th April that he's decided not to abolish this small but significant perk to investing in an equity ISA.

More: ISA Centre