As a lover of Scotch malt whisky, Ken Loach’s Angels’ Share film provided superb entertainment for me one October evening whilst on holiday in the Scottish Highlands (after the kids were safely tucked up in bed!)
The devastating realisation that a percentage of whisky evaporates as it matures for years in oak barrels made me think of how our savings can suffer a similar fate.
When it comes to money, it’s not the mildly appealing vision of skyward angels enjoying a dram of Uisge Beatha that comes to mind – it’s an unwelcome chunk of our investment growth going to Her Majesty’s Revenue and Customs in the form of tax!
Fortunately, there’s a way to create a better ‘seal’ around our hard-earned cash and keep it out of the taxman’s reach – Individual Savings Accounts (ISAs).
These were first introduced back in 1999 and at the time, you could choose between Mini or Maxi ISAs and your money could be invested in Cash, Stocks and Shares or Life Insurance.
Over the years, successive governments have created new options, changed the yearly allowances and to be honest, it’s reached the point where it can be quite confusing if you’re starting out on your investment journey.
Nevertheless, due to the tax advantages, it’s worth putting in a bit of effort to understand your options. Over the next few weeks, we’ll take a look at the main types of ISA as we approach the end of this tax year on 5th April 2021.
For now, we’ll begin with an overview of five main types of ISA and some of the general advantages on offer.
Don’t give up your ‘angels’ share’
First of all, let’s understand the tax situation. Broadly speaking, ISAs are free of income tax and capital gains tax. In the current environment, this is no big deal if you simply have a cash ISA, because interest rates are negligible, and you’ll likely be covered by the personal savings allowance anyway.
But as your savings build up over the years, the tax shelter could become very significant. Stocks and shares ISAs can be a superb solution for long-term investing and with no capital gains tax to pay when you withdraw, there can be the potential to save thousands of pounds in tax later down the line.
Think of it as squirreling your money away into empty whisky bottles, with a seal so tight, than nothing can escape in the form of tax.
Money held in ISAs does not need to be declared on tax returns either, so it can help simplify administration too.
It’s worth remembering that ISAs still form part of your estate for inheritance tax purposes, but at least you can enjoy tax free growth and withdrawals whilst you’re alive!
Use it or lose it
We all have a maximum ISA allowance each tax year (6th April to the following 5th April). In 2020 / 2021, the overall allowance is £20,000 per person so if you have the means, tax free savings can build up very significantly over the years.
If you don’t use all of your allowance one year, however, you can’t catch up by saving extra next year. There is no carry forward of unused allowance, so it’s best to fill up those tax-free bottles as best you can every year.
Don’t over-do it
The after effects of too much scotch are well documented and I may even have suffered from this myself once or twice.
Less painful (although still a pain to deal with) is the over-subscription of ISAs. Whilst there’s no limit on the amount of different ISAs you can own in general, you cannot pay into more than one of the same type of ISA in any tax year.
For example, you can’t open two different cash ISAs in the same tax year. You could, however, pay into one cash ISA and one stocks & shares ISA.
HMRC keep tabs on all of this because your National Insurance number is recorded on each ISA account, so if you breach the rules, you’ll hear from the taxman!
Choose the best flavour for you
It’s a hotly debated topic among whisky lovers – peated, smoky, sweet, spicy, oily or dry….it’s all about personal preference, really.
I’d argue that ISA options are much less tricky to navigate, but still, it can be a challenge at first. The guide below summarises the five main categories of ISA. Not all types are available to all people and it’s important to understand the purpose of each type.
For example, stocks and shares ISAs are good for longer term investment (think at least five years). Lifetime ISAs are attractive if you expect to use the money to help buy your first home or to enjoy life after 50.
So keep an eye out for my blogs over the next five weeks and we’ll look at each of these types in a bit more depth.
Remember that allowances and tax rules change from time to time, so with a budget due on the 3rd of March, we’ll consider any changes that might come in for the 2021 / 2022 tax year.
Who knew that ISAs and whisky could be woven into a financial coaching blog? I think that deserves a wee dram!