ISAs 

Isas have become a useful first building block

This article is part of
Guide to the Isa market

Isas have become a useful first building block

Isa have been in existence since 1999, and have long been touted as a successful savings scheme, launched by HM Treasury.

They offered a fairly simple option: invest in stocks and shares, or put your money in cash, and all the income, interest and capital gains would be paid tax-free.

They started out as being for cash, life insurance and stocks and shares.

Now, we have the above, except for the life insurance iteration, as well as the Innovative Finance Isa, Lifetime Isa and Help to Buy Isa.

Tax-free savings and investments

Patrick Connolly, chartered financial planner and head of communications at Chase de Vere, says: "Isas have been popular because they give people the opportunity to save in cash or invest in stocks and shares and receive all income or growth tax-free.

"This can be particularly beneficial for higher and additional taxpayers and those who use their annual capital gains tax allowance."

He continues: "While many people don’t benefit from significant, or any, tax savings, particularly since the introduction of the Personal Savings Allowance and the Dividend Allowance, they still welcome the simplicity of Isas and the fact that neither income or growth needs to be declared on a tax return.

"While there are now different iterations of the Isa, most people stick with cash and/or stocks and shares and so, for them, the Isa rules remain straightforward and easy to understand."

Scott Gallacher, a chartered financial planner at Rowley Turton, explains: "The tax-free nature of Isas has been a great selling point. Who doesn’t want something that’s tax free?

"Although, with the changes to the tax rules relating to dividends for most people, Isas no longer offer any real tax saving."

"That said, Isas remain a very tax-efficient investment vehicle for higher rate taxpayers, company directors already using their dividend allowance, and those with significant investment portfolios."

Mr Gallacher adds: "Isas are also a good barrier between the client and the taxman and can be helpful in reducing a client’s taxable income, which can have other tax advantages - for example, keeping one’s taxable income below certain thresholds."

By this, he means £50,000 for the higher income child benefit tax charge, £100,000 for loss of personal allowance, or £110,000 for the threshold income test for the tapered annual allowance for pension contributions.

Government meddling

Because the whole concept of having tax-free savings was so popular, many governments have sought to get involved and change them, or create new Isas, so people can use ever more complex vehicles to get tax relief.

Mr Gallacher says: "Governments are keen to score political points and exploiting the popularity of Isas by offering different versions is a fairly low-cost way of winning support."