The ISA clock is ticking...

Wednesday, 25th February 2009 15:42 - by Resident IFA

There are just 39 days left in the 2008/2009 tax year for a contribution to be made into an Individual Savings Account (ISA). In simpler terms, the deadline is April 5th. After this date, an ISA contribution will be treated as made in the 2009/2010 tax year. What is an ISA? A tax-free savings and/or investment vehicle, gains being immune from Income Tax and Capital Gains Tax (CGT), but not Inheritance Tax (IHT). How much can you contribute to an ISA? Well, it depends upon your approach to saving and/or investing and attitude to risk. The overall limit per individual (UK resident for tax purposes or Crown employee) is £7,200 in each tax year. What do I mean by “depends upon your approach to saving and/or investing and attitude to risk”? The term ‘Saving’ generally applies to money held on deposit (in an account), whereas the term ‘Investment’ denotes a longer-term commitment, i.e. 5 years or more, and has the connotation of risk, i.e. your invested money can fall in value as well as rise...or fall as well as plummet if you invested money around 18 months ago! With this in mind, you can contribute to an ISA in the following combinations: o Up to £3,600 into a ‘Cash’ variant (effectively a tax-free savings account) and up to £3,600 into an ‘Investment’ variant. The Investment variant can contain collective investment funds such as ‘OEICs’ or even individual shares. o You do not have to contribute to both. You could, for instance, contribute to a Cash ISA only. o If you contribute to one variant, say £600 to a Cash ISA, it does not mean that you can use the residual allowance to contribute to the other variant. In this example, you would have £3,000 unutilised Cash ISA allowance, but could still only contribute up to £3,600 to an Investment ISA (Not £6,600 by taking the unused Cash ISA allowance). o If you are a person who likes to invest rather than hold Cash you can, however, invest up to the full £7,200 ISA allowance into an Investment ISA. The Government wants to encourage investment into shares (especially of UK companies), thus have this ISA rule to encourage such investment. Again, if you invest even £1 over the £3,600 threshold, this precludes you from then investing into a Cash ISA in the same tax year. As is always my perpetual plea, ensure you shop around for the best Cash ISA rates (Beware: Some ‘net of tax’ interest rates from standard savings accounts are currently higher than Cash ISA interest rates) and take Independent Financial Advice if you wish to consider an Investment (Aka Equity) ISA contribution...unless you are very confident! Happy tax planning! Until next time...