The Motley Fool

To ISA Or Not?

Earlier we said that whatever we plump for as a first investment, we’ll probably want to shelter it from the taxman by using an Individual Savings Account, or ISA. So let’s spend a little time looking at what they are.

Double the protection

An ISA can protect you from both income tax and capital gains tax (CGT).

Admittedly, the income tax benefits are not what they were when ISAs were first introduced in the 1990s. Basic rate taxpayers usually don’t have to pay tax on any dividends they receive, so you only benefit from income tax protection if you’re a higher-rate taxpayer.

The key attraction of an ISA is the protection from CGT. Although the CGT rate is less than it has been in the past, it may not feel that way if you have to write out a big cheque to the taxman! You do get an annual exemption amount for CGT, but if you’re investing regularly over a number of years, you can soon build up profits far greater than this amount.

Tax rates change

Bear in mind that tax rates change over time, sometimes quite significantly. So although investment income and gains aren’t taxed that harshly at the moment, that may not always be the case. Of course, at some stage the government could even decide to do away with ISAs completely. We think that’s unlikely however, as it seems a sure-fire vote loser.

So we believe it pays to protect your investments right from the very start, even if you are investing as little as £25 a month. Most funds and shares can be put in an ISA for no additional charge, so you’re often getting valuable protection at no additional cost. Think of taking out an ISA as (more or less) free insurance against paying tax in the dim, distant future. You may not need it, but it’s nice to have it, just in case.

You can read more about ISAs in this Fool guide.

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