How to get the most from your ISA allowance: understanding the tax
Individual Savings Account or ISAs offer a very valuable tax exempted “wrapper” for your money, and so are a good place to put medium to long-term savings.
Unfortunately, given bank interest rates are currently very low in the UK and inflation has recently risen sharply post-Brexit to 2.7 per cent, this means that cash savings will decline in real value over the long-term.
Once you’ve put money into an ISA account, any growth produced is tax free and the details of investment held in an ISA or any income received from an ISA don’t have to appear on a tax return.
These factors combined with the very low rate of return available on cash deposits makes ISA saving more important than ever.
How the tax on investments actually works:
| Rates of tax | Basic Rate | Higher Rate | Additional rate | ISA investors |
| Dividend Income | 7.5% | 32.5% | 38.1% | 0% |
| Capital Gains- where gains exceed the annual allowance of £11,300 | 10% | 20% | 20% | 0% |
| Interest income-
Basic rate taxpayers have a £1,000 savings allowance and for higher rate taxpayers this falls to £500. |
20% | 40% | 45% | 0% |
A really smart ISA investment strategy will ensure that you make use of all tax efficient allowance, allowances for dividend income and capital gains, and then the full ISA allowance which in this year is £20,000 for every UK adult.
As you can see, taxation is an important factor when considering any investment and it’s important to have an understanding of your overall tax position. This is one of the major advantages of working with a professional adviser on an ongoing basis.
What can you hold in an ISA?
- Investment Funds- Unit Trust, OEICs and Investment Trusts
- Shares in individual Companies
- Exchange Traded Funds
- Government Bonds and Corporate Bonds
- Cash deposits
- Crowd-funding projects (via Innovative Finance ISAs)
This gives ISA investors a huge range of options when they come to plan their strategy but in the current environment we are finding a lot of investors are looking to ISA savings for additional income.
How to generate income from an ISA… and make it a #NicerISA
There are a great many ethically screened and conventional funds which target an income yield for investors. The Castlefield B.E.S.T Sustainable Income fund currently offers a yield of 3.7 per cent by investing into a portfolio of shares offering good dividend yields, in particular; Greencoat UK (renewable energy infrastructure), National Grid, AVIVA and Prudential.
Buying into a fund makes it relatively easy for an investor to access a high-yielding portfolio without having to spend time doing their own research. So, a fund offers a “one stop shop” when it comes to obtaining a regular flow of income. However, investors need to tread carefully as dividend income is not guaranteed and relies on corporate profitability. A fund manager will maintain oversight over the portfolio and sell holdings if the company looks overstretched and might become unable to meet its dividend, and a fund will typically hold 40+ individual companies.
Another option for income investors is buying Corporate Bond funds. Again, these products bundle together assets which deliver an income, but rather than buying shares these funds own the debt of major UK and International businesses.
Rathbone’s Ethical Bond fund for example generates a yield of 3.8 per cent per annum by investing into a range of bonds issued by financial firms; Standard Life, AXA , Royal London and also HSBC.
In addition to the Rathbone’s fund, Royal London and Threadneedle offer bond funds which have similar ethical profiles. The Threadneedle product in particular has a focus on investing for impact and works closely with Big Issue Invest. The Threadneedle fund currently yields 2.5 per cent from a portfolio which includes Wellcome Trust Bonds, Unite Group and Nationwide; all “investment grade” but with some positive social impact. Royal London offers a higher yield at 3.42 per cent.
ISA and investment planning is a complex undertaking so if you are at all unsure or uncertain in these matters it’s best to take independent regulated advice from a qualified person.
This article is for information purposes only and should not be relied upon as the basis for individual planning decisions.
Note: All fund date is obtained from FE Analytics and is correct as at date of publication.
