ISA allowance for this tax year FY16 runs out soon

The end of the current tax year, 5th April 2017, is approaching fast; the opportunity for savers to invest up to £15,240 in an ISA (Investment Savings Account) will end at the same time. Savers can invest their annual savings allowance of £15,240 in Cash or in Stocks and Shares ISAs. From 6th April 2017 the individual annual allowance for Cash or Stocks and Shares ISA investments increases to £20,000.

ISAs explained

  • Anyone in the UK aged 16 or older;
  • Can save or invest up to £15,240 per tax year;
  • Without paying tax on interest earned on their savings, or paying reduced tax rates on investments including dividend payments;
  • Once money or individual company shares are invested in an ISA they remain tax free, or tax-efficient.

Cash ISAs explained

  • Cash ISAs are savings accounts that are tax free, there are two types of Cash ISAs – i) fixed ISAs where the money attracts a higher interest rate on savings but cannot be withdrawn, and ii) easy access ISAs where money can be withdrawn without attracting interest savings penalties;
  • Interest on savings for top paying easy access ISAs have consistently out performed easy access savings accounts over the last five years.

However the return on a Cash ISA investment is affected by rates of inflation (RPI) and also the interest rate on savings – Savings Rate. Since the recessions of 1999 and of 2008 the Bank of England has kept interest rates low to control inflation and to encourage economic growth, which means that both RPI and the Savings Rates have been impacted. Cash ISAs are not as attractive now, as they were in 1999 – see below.

Cash ISAs 1999-2017

April 1999, the landscape for cash ISAs is very attractive:

  • Average ISA Savings Rate 6.32%
  • Inflation (RPI) 1.60%
  • Tax Free Real Returns 4.65%

April 2017 the landscape is very different:

  • Average ISA Savings Rate 0.46%
  • Inflation (RPI) 2.50%
  • Tax Free Real Returns -1.99%

 Stocks and Shares ISAs explained

  • Investors can transfer current tax year Cash ISAs into Stocks and Shares ISAs, provided the whole amount is transferred.
  • Investors are also able to transfer any previous tax years Cash ISAs into Stocks and Shares ISAs without affecting the current tax year’s ISA allowance.
  • Stocks and shares ISAs provide investors with a way to invest individual company shares and money in a tax efficient The savings in the ISA can be invested in unit trusts, open-ended investment companies (Oeics), investment trusts, government bonds and corporate bonds where there is growth potential meaning that the value of the investments can go up. (Though past performance of stocks and shares investments is not a guide to future performance). Where investors pay higher or additional rate tax the advantages for tax-efficiency of Stocks and Shares ISAs is significant.
  • Spouses can inherit their deceased spouses ISA allowance regardless of their own tax and personal savings allowances.

Using your ISA allowance – up until 5 April 2017

  • If you haven’t yet taken advantage of a Cash or a Stocks and Shares ISA in this tax year, you still can up to the allowance of £15,240 and
  • For this tax year ‘without tax’ means that if your savings earn £100 in interest you will keep all of the £100.

Contact an expert

We know that personal savings allowances, inheritance tax, and other investments are subject to change come 6 April 2017.

For expert, friendly and considered advice about current investments, please contact Hamish Gairns or Richard Smith at Marchwood IFA.

hamish@marchwoodifa.co.uk or richard@marchwoodifa.co.uk