Why owning a Stocks and Shares ISA could be more important than ever!

The benefits of investing in a Stocks and Shares ISA are set to increase following changes to dividend and CGT rules announced last week.

The content of this article was relevant at the time of publishing. Circumstances change continuously and caution should therefore be exercised when relying upon any content contained within this article.

Businesswoman calculating finances in an office

Image source: Getty Images

When investing, your capital is at risk. The value of your investments can go down as well as up and you may get back less than you put in.

Read More

The content of this article is provided for information purposes only and is not intended to be, nor does it constitute, any form of personal advice. Investments in a currency other than sterling are exposed to currency exchange risk. Currency exchange rates are constantly changing, which may affect the value of the investment in sterling terms. You could lose money in sterling even if the stock price rises in the currency of origin. Stocks listed on overseas exchanges may be subject to additional dealing and exchange rate charges, and may have other tax implications, and may not provide the same, or any, regulatory protection as in the UK.

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More.

I’ve been an active Stocks and Shares ISA investor for years. For me, it’s a brilliant way to maximise my investment returns by stopping the taxman taking a slice of my profits. I can invest up to £20,000 a year this way too.

For me, the ISA appeal has jumped following changes to dividend and capital gains rules too. The tax burden of UK investors not using one of these tax wrappers could be about to balloon.

Tax changes

The treasury is getting tough in order to plug the black hole in Britain’s finances. So from next year, the dividend allowance will be cut from £2,000 this year to £1,000 from the 2023-2024 tax year. It will then fall further to £500 from April 2024 under plans announced in Thursday’s autumn statement.

This means that anyone earning dividends above these amounts will have to pay tax on the rest, depending on their total income.

UK share investors also face higher capital gains tax (CGT) contributions as the annual exempt amount falls. The current level of £12,300 will fall to £6,000 next year, and then to £3,000 the following year.

As senior investor and markets analysts Susannah Streeter of Hargreaves Lansdown comments: “This rise is a stark reminder of the value of ISAs in protecting investors from having to consider CGT or dividend tax.”

Please note that tax treatment depends on the individual circumstances of each client and may be subject to change in future. The content in this article is provided for information purposes only. It is not intended to be, neither does it constitute, any form of tax advice. Readers are responsible for carrying out their own due diligence and for obtaining professional advice before making any investment decisions.

Inflation protection

Those tax changes make investing in a Stocks and Shares ISA even more appealing to me today. But it’s not the only reason I prefer using them to reach my investment goals. Buying shares in one of these products is also a better way of protecting my wealth in this period of high inflation.

Savings rates on cash accounts have improved rapidly during the past year. This follows aggressive Bank of England interest rate hikes to current levels of 3%. With rates tipped to hit peak at around 5% in 2023 the returns on savings products is likely to keep improving too.

But in the grand scheme of things, interest rates on products like Cash ISAs remain pretty poor. The best-paying no-notice Cash ISA on the market (from Skipton Building Society) currently offers an interest rate of 2.75%.

That is well below the 11.1% rate of CPI inflation that Britain recorded in October. In effect, any money sitting in a Cash ISA today is losing value at a spectacular rate.

Better returns with UK shares

Its true that many UK share investors also face making a negative return right now. The long-term average annual return tends to range 8-10%.

But this isn’t a million miles off the current rate of CPI inflation. And given that prices are rising at their fastest for 40 years, this isn’t a bad result at all, in my opinion.

What’s more, as a Stocks and Shares ISA investor, I have a chance to beat that 8-10% average. The London Stock Exchange is packed with thousands of shares that could provide market-beating returns. With a Cash ISA, I don’t have that opportunity. Right now, that 2.75% rate is as good as it gets.

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

Royston Wild has no position in any of the shares mentioned. The Motley Fool UK has recommended Hargreaves Lansdown. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

More on Investing Articles

Passive income text with pin graph chart on business table
Investing Articles

Yields of up to 7%! I’d consider boosting my income with these FTSE dividend stocks

The London market has some decent-looking dividend stocks right now, and I’m tempted by these two for growing income streams.

Read more »

Young mixed-race couple sat on the beach looking out over the sea
Investing Articles

I’d put £20K in an ISA now to target a £1,900 monthly second income in future!

Christopher Ruane shares why he thinks a long-term approach to investing and careful selection of shares could help him build…

Read more »

Mature couple at the beach
Investing Articles

6 stocks that Fools have been buying!

Our Foolish freelancers are putting their money where their mouths are and buying these stocks in recent weeks.

Read more »

Black woman using loudspeaker to be heard
Investing Articles

I was right about the Barclays share price! Here’s what I think happens next

Jon Smith explains why he still feels the Barclays share price is undervalued and flags up why updates on its…

Read more »

Investing Articles

Where I’d start investing £8,000 in April 2024

Writer Ben McPoland highlights two areas of the stock market that he would target if he were to start investing…

Read more »

View of Tower Bridge in Autumn
Investing Articles

Ahead of the ISA deadline, here are 3 FTSE 100 stocks I’d consider

Jon Smith notes down some FTSE 100 stocks in sectors ranging from property to retail that he thinks could offer…

Read more »

Young female business analyst looking at a graph chart while working from home
Investing Articles

Why I think Rolls-Royce shares will pay a dividend in 2024

Stephen Wright thinks Rolls-Royce shares are about to pay a dividend again. But he isn’t convinced this is something investors…

Read more »

Investing Articles

1 of the best UK shares to consider buying in April

Higher gold prices and a falling share price have put this FTSE 250 stock on Stephen Wright's list of UK…

Read more »