Your ISA allowance: use it or lose it
PUBLISHED: 09:44 28 February 2020 | UPDATED: 09:57 28 February 2020
The new, multi-tasking Chancellor has to work out what to do with the current ISA allowance, says financial columnist Peter Sharkey.
Photographs of the Chancellor published in late February and early March are invariably accompanied by a reference to him 'putting the finishing touches to the forthcoming Budget'. If, in the latest published image of Rishi Sunak, the new Chancellor is doing just that, we have a genuine superman at the helm of the nation's finances. That's right: a bloke who can multi-task.
The carefully staged photograph shows Mr Sunak making himself a cup of tea (for his Treasury team) with a sentence below referring to him, well, you know. However, though he's smiling for the camera while holding a teabag, he's clearly engaged in some serious mental arithmetic, calculating the impact of reducing the rate of pension tax relief for higher earners from 40% to 20%. Such a dramatic move would raise an estimated £10 billion a year, although it would be the equivalent of political suicide.
Mr Sunak's Budget preparations are peppered with similar quandaries, meaning he has very little wriggle-room to display much in the way of largesse.
On the one hand, the government appears committed to a prolonged period of massive public spending, while on the other, it has made political pledges to reduce the tax burden on most of us.
In January, Mr Sunak's predecessor, Sajid Javid, announced an effective tax cut of £104 for 31 million people, raising the threshold at which NIC becomes payable to £9,500 from April. The level will eventually rise to £12,500, making most of us almost £500 a year better off.
Yet given the colossal scale of public spending commitments, the money to pay for projects such as HS2 will need to come from somewhere. The likelihood is both individuals and businesses can expect that whatever Mr Sunak gives with one hand, he'll take away with the other. Was it ever thus?
The higher up the personal tax ladder you go, the more, ahem, creative some of the schemes to avoid it become. It follows that while we can probably expect peripheral tweaking of a handful of legitimate tax avoidance schemes, any such changes will only affect a comparatively tiny number of taxpayers.
Meanwhile, the overwhelming majority of people will be keeping a very close eye on possible changes to the tax treatment of personal pensions and ISAs, two of the most valuable 'taxation shields' available.
The value to savers of ISAs in particular has become more pronounced in recent years as the annual savings limit has risen to £20,000.
Introduced in 1999, the ISA allowance remained fixed at £7,000 until 2008, since when it's almost trebled; it's been £20,000 since 2017.
Money paid into an ISA has already been taxed so once inside, your savings grow tax-free. This ensures there are two significant benefits of having an ISA. First, all income, usually dividends, produced by investments bought through an ISA is protected from tax.
Over time, this could amount to a significant saving.
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For example, a couple saving £10,000 a year each into a stocks and shares/investment ISA would have accumulated £200,000 in the space of a decade. If their ISA portfolios produced an annual dividend yield of 4%, they would enjoy a tax-free return of £8,000. Assuming our couple were basic rate taxpayers, saving the same amount outside of an ISA would make them liable for a 7.5% tax on half of that dividend (£300) as the first £2,000 of dividend income is tax-free.
Second, all investment growth the couple enjoyed would also be tax-free.
Again, let's assume our couple saved the same amount over ten years and their ISA investment grew by an annual average of 5.25%, including dividends, which they reinvested. Within a decade, their ISA fund would be worth £262,294, a gain in excess of £60,000. If they carried on saving at the same rate for another 10 years, their fund would be worth more than £705,000 and they would have no tax to pay on the £300,000-plus profit they had enjoyed.
People occasionally dismiss stocks and shares ISAs as small fry, but over time, as the example above highlights, their tax-saving features compound themselves to the point where they can create extremely handsome returns.
It seems very unlikely that our new, multi-tasking Chancellor will consider changing the annual ISA allowance, but that's not to say his successors will be as generous...
TAM Asset Management Ltd offer savers the opportunity to invest their savings in Investment ISA portfolios comprising a variety of different funds pursuing long-term cautious, balanced or adventurous strategies. For further details, please visit the MoneyMapp website.
WEEK IN NUMBERS:
- £82,000 According to the Financial Conduct Authority (FCA), consumers who are scammed end up losing 22 years' worth of pension savings, which equate to an average of £82,000. The FCA said that pension scams are a 'significant' threat to savings and their owner's confidence.
- 40 years As the nation's two biggest mortgage lenders, Halifax and Nationwide offer mortgage terms of 40 years, a report in The Times this week revealed that in 2018, half a million homeowners took out a mortgage lasting more than 25 years. Of these, almost 11,000 signed up for mortgages lasting 40 years.
- £190 million FRP Advisory, the corporate restructuring company that worked on the collapse of both Comet and Patisserie Valerie, among others, has plans to list on London's AIM market. Its value is estimated to be £190 million, but as high street retailers continue to struggle, demand for FRP's services looks likely to increase, possibly boosting its market value.
For more financial advice, check out Peter Sharkey's regular column, The Week In Numbers.