Why Invest In An ISA?
- Date: 2007-02-14 - Word Count: 423
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In the UK, since Gordon Brown grabbed an estimated £5 billion every year from our pension funds by abolishing tax credits on dividends (while a senior member of a government that tells us we must save more for our retirement!) many people now think there is no point in having Individual Savings Accounts, known as ISAs. Although it is true that they have lost some of their attraction since you cannot now reclaim tax credits on ISAs invested in shares or unit trust type funds, there are still good reasons for taking advantage of ISAs: 1. Administratively, ISA income is not only untaxed but also non-declarable. 2. Income from ISAs is not subject to higher rates of income tax, and ISAs are not liable to capital gains tax. 3. If the investments within the ISA are - or are later switched to - bonds rather than shares, the income is then counted as interest and not dividends, and you can then reclaim the 20% tax. 4. When you reach the age of 65, your annual personal income tax allowance rises from about £4,800 to about £6,800. It jumps again, although not as much, when you reach 75 years of age. However, if your total income exceeds a certain threshold, you lose £1 of this extra allowance for every £2 of extra income. This is a very high effective marginal rate of tax! But ISA income, being non-declarable, does not count towards this total income. Note that the Chancellor stated recently that ISAs are now to continue indefinitely, so you can shelter £7,000 every year. A couple of other recent changes have also helped. One improvement is that you are now able to mix fund managers as well as funds within one ISA. For example, you can choose seven different funds and invest £1,000 in each: this gives you a wider spread and added security. The other change is that the government has announced that in future people with cash ISAs will be allowed to switch them to equity ISAs but, oddly enough, not the other way round.
Finally, even if you still don't want to invest in equity ISAs, at the very least you can deny Gordon Brown some tax revenue by transferring your cash savings into a cash mini-ISA as quickly as possible. You are allowed to shelter up to £3,000 in each tax year. Remember, tax avoidance (that is, taking steps to ensure that you do not pay any more tax than you have to) is right and proper; only tax evasion is illegal!
Related Tags: personal finance, isa, safe investment, tax shelter
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