The Stocks and Shares ISA is a hugely popular tax break, but also a costly one. HM Treasury loses more than £3.3bn worth of tax to ISAs each year. Given the parlous state of the government coffers, our favourite tax-free savings wrapper could one day be hacked back.
Chancellor Jeremy Hunt is already attacking non-ISA investors on two fronts. From 6 April, he will cut the capital gains tax (CGT) threshold from today’s £12,300 to just £6,000 a year. From April 2024, it falls to £3,000.
The case against ISAs
Hunt is also taking his axe to the dividend allowance. Currently, this allows those buying stocks and shares outside of the ISA tax wrapper to earn up to £2,000 a year in dividend income, before paying income tax on the money.
The dividend allowance will be halved to £1,000 from this April, then to £500 the following year.
I would use my CGT allowance to pocket any non-ISA gains free of tax this year, then buy them back next day inside an ISA. This process is known as Bed & ISA, for reasons I’ve never understood.
I’d also aim to use my Stocks and Shares ISA to the max, because its future is far from assured.
Last month, think tank The Resolution Foundation urged Hunt to cap the total amount people can save in an ISA at £100,000. It claims this will save the government £1bn a year in taxes.
It said the ISA structure favours the wealthy and the money saved could be used to help families who have little or no savings.
Use it or lose it
It isn’t the first think tank to attack ISAs. Two years ago, the Social Market Foundation called for change saying the tax-free wrapper mostly benefits older, richer savers. It said the government should support younger, lower-income workers instead.
It would be a brave chancellor who attacked ISAs, which remain hugely popular. Last year, 13m took one out. In total, a staggering 27million adults hold ISAs worth £687bn, making the average holding £25,444.
Yet the political groundwork is being laid, and if Hunt doesn’t act, one of his successors might.
It therefore makes sense to use the £20k ISA allowance to the max, both before and after this year’s deadline at midnight on 5 April.
The FTSE 100 has been flying lately but is still packed with bargain stocks. I’ve drawn up a hit list of bargain shares to buy and hope I can find the money to purchase all of them before April 5 comes round.
BT Group, Legal & General Group and Unilever all offer me the prospect of long-term capital growth combined with healthy levels of dividend income. Their share prices have failed to keep pace with the recent FTSE 100 surge, which makes them even more tempting to me. That’s because it reduces the chances of me paying over the odds.
There are plenty more FTSE 100 dividend growth stocks I’d like to buy. Sadly, I don’t have £20k at my disposal today, but I’ll invest all I can afford in the weeks ahead.
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.
