With the new tax year now just over a week away, we are fast approaching the annual deadline for clients to take advantage of their tax-free Isa allowance.
While we would traditionally advise customers to think about how they might like to use their allowance several months ahead of time, many people still leave it until the eleventh hour.
If your clients still have questions about Isas as the deadline approaches, it is worth them having a quick overview of the most common Isas to hand, as well as the various tax protection benefits they offer.
How can Isas protect savings from taxes?
The annual tax-free Isa allowance can be a useful means of sheltering investments from tax, as well as reducing the impact of tax on any potential investment returns.
Essentially, any income (including interest and dividends) from investments held within an Isa is not subject to income tax.
There is also no personal liability to pay tax on income or capital gains from investments held within Isas, meaning that clients do not need to declare the income or gains on their tax return.
Cash Isas versus investment Isas
While there are several different types of Isas on the market, most customers’ questions are likely to focus on the relative merits of the two main types – cash Isas and investment (also known as stocks and shares) Isas.
Cash Isas are attractive to customers as, on top of being tax-free, they can be easily accessed at any time, offering convenience and flexibility.
A Cash Isa may be a wiser investment for additional-rate taxpayers – who do not receive a personal savings allowance – instead of an ordinary taxable account as they will be protected from the higher tax rates. For example, an additional-rate taxpayer would only receive £55 for every £100 worth of interest in a normal savings account, whereas in a cash Isa they will receive the full amount.
Those looking for a tax-efficient way to save for longer-term goals – such as retirement planning – may want to invest in a stocks and shares Isa, which offers the possibility of better returns in the long run.
When advising clients on whether this Isa is right for them, encourage them to consider their investment goals, including exactly how long they want to save for and their attitude to financial risk.
With-profits Isas are also counted as stocks and shares Isas and can show better investment returns than cash without the volatility of a direct investment in shares.
It is particularly important to stress to customers that the value of investments and any income can go down as well as up, meaning they may get back less than they invest.
Specialist financial advice will remain crucial
Given the upcoming Isa deadline, as well as ongoing Brexit uncertainty, the professional guidance an experienced financial adviser offers will be more crucial than ever.