You’ve used your ISA allowance – what’s next?
With the individual savings account (ISA) allowance now at £20,000 – or £40,000 for a couple – it is difficult for many people to save more than that amount each year.
However, there are times when an investment matures or you receive an inheritance, a lump sum paid from a pension Or an unexpected generous redundancy payment. Where such money becomes available over and above the ISA allowance, you may need to consider investing into funds or other investments on a direct basis. Very often, these non-ISA investments are held on investment platforms in what is usually called a ‘general investment account’. ISAs are tax-privileged tax wrappers – the funds they contain are free of UK tax on both investment income and capital gains. Outside the ISA wrapper, there are potential tax charges. But they need not be as punitive as you might expect – depending on your circumstances. The main taxes are:
On the income produced by your non-ISA investments. This income is produced by interest on bond investments (fixed interest) and cash. As well as dividends on equity investments (stocks and shares). Income from such investments as cash deposits or bond funds is taxed as savings income. Investors may qualify for the personal savings allowance of £1,000 (£500 for higher rate taxpayers) and possibly even the 0% starting rate of tax of up to £5,000, where non-dividend and non-savings income is less than £16,500. The first £5,000 of dividends in 2017/18 is covered by a dividend allowance and that is taxed at 0%. The excess is taxable at 7.5% for basic rate taxpayers, 32.5% for higher rate taxpayers and 38.1% for additional rate taxpayers. From 6 April 2018 the dividend allowance is due to fall to £2,000.
Capital gains tax
(CGT) on the capital gains you realise. CGT is a tax that lends itself to being managed for maximum tax efficiency. That is because tax is only payable when units or shares are sold and create a gain. You have an annual CGT-exempt amount of £11,300. This means that you only pay tax (at 10% or 20% if you are a higher rate taxpayer) on gains on funds above that. Gains on property incur an extra 8%.
One of the options available is to rebalance your non-ISA investment portfolio at least annually. Many investors use their annual ISA allowance by selling the investments they hold directly and reinvesting them into their ISAs. In this way you can often realise relatively small gains that may be fully or partially within
the annual CGT exempt amount of £11,300. This reduces the possibility that taxable gains will accumulate to cause you a problem in the future if you wanted to withdraw a large sum from your portfolio.
So with the increase in the ISA allowance, it might not be long before your directly held investments are transferred into your taxfree ISA account. In the meantime, with care, the tax you need to pay on these other investments can be managed efficiently. The value of tax reliefs depends on your individual circumstances. Estate and tax planning are not regulated by the Financial Conduct Authority, and tax laws can change.
The value of your investment can go down as well as up and you may not get back the full amount you invested. Past performance is not a reliable indicator of future performance. Investing in shares should be regarded as a long term investment and should fit with your overall attitude to risk and financial circumstances.
Stocks and shares ISAs invest in corporate bonds; stocks and shares and other assets that fluctuate in value. Investors do not pay any personal tax on income or gains, but ISAs do pay unrecoverable tax on income from stocks and shares received by the ISA managers.