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Something for nothing

13 April 2017

The ISA allowance has increased to £20,000 meaning investors can save almost a third as much again in their ISA.

It’s not often you get something for nothing from the Treasury – but you do this month. On 6 April, the first day of the 2017-18 tax year, the annual individual savings account (ISA) allowance rose from £15,240 to £20,000. That means you now have the opportunity to save almost a third as much again in ISAs, keeping more money out of the reach of the taxman.

Hopefully, the increase will be just the kickstart that ISAs need. The scheme seems to have become less popular in recent times - the early indications are that ISA investments in the 2016-17 tax year were down on previous years, even allowing for the inevitable last-minute rush by investors to use their allowance before it expires on 5 April.

That’s almost certainly because of the Government’s decision last year to introduce dividend and personal savings allowances, which mean people don’t pay tax on some savings and investment income even outside of an ISA. Those allowances appeared to undermine the upfront benefits of ISA investment.

Still valuable

It’s important to recognise, however, that neither allowance made any difference to the ISA rules themselves. All interest and dividends paid on investments held within an ISA remain free from income tax and there’s no capital gains tax to pay on profits of any size.

Moreover, the ISA rules remain generous and flexible – far more so than tax-efficient pensions, for example. There’s no cap on the amount you can build up in ISAs, as long as you stay within the annual investment allowance each year; indeed, an increasing number of investors have become ISA millionaires. Nor are there any restrictions on withdrawals – you can get at your money any time you like without having to worry about tax.

There’s even a new tax benefit to enjoy. New rules simplifying the regulation on what happens to your ISAs when you die mean spouses and civil partners will in future almost always be able to pass their accounts to their other halves without the tax protection being foregone. ISA savings and investments will continue to count towards inheritance tax calculations, but this is still a significant improvement on what’s gone before.

So, while it’s true that ISAs may no longer offer an immediate income tax saving for many investors, that’s definitely not a reason to forget about them.

Start sooner rather than later

For most people, of course, £20,000 will be a sizeable sum – there will be many who don’t have the resources to take full advantage of the higher allowance. However, that’s not a reason to pass up on ISAs altogether – you’ll still get a benefit on whatever resources you are able to allocate to your investments this year.

While the tax year has only just begun, it makes sense to get on with your ISA savings and investments as soon as possible. For one thing, the sooner your money is earning a return – and benefiting from compound interest – the better. Leaving ISA investment until the last minute means forgoing returns in the meantime.

Also, with a new higher allowance to aim for, breaking your ISA investments down into more bite-sized chunks could be your best chance of taking full advantage. The regular savings schemes offered by many leading investment companies accept savings of as little as £25 a month. Such funds represent a low-cost and accessible way into ISA investment.

Over a year, you’d need to be investing just over £1,666 a month to take full advantage of the 2017/18 ISA allowance, but if that’s not an option for you, set your contributions lower. Over time, even relatively small investments can build up to considerable sums. If you’d been putting £100 a month into the average investment company over the 18 years since ISAs were launched in 1999, you’d have well over £50,000 today.

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