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."
The tax-free nature of Isas has been a great selling point. Who doesn’t want something that’s tax free?Scott GallacherHe 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."
Mr Connolly cautions: "The newer Isa versions are well-intentioned, such as to help people onto the property ladder or to invest tax efficiently in different assets. But there is a risk that these changes, and the different rules which can apply to different products, can cause confusion
"This would be a pity as one of the key benefits of Isas has, in the past, been their simplicity."
Nonetheless, despite their increasing complexity, Isas have an important role to play in basic financial planning, even if it is just to hold emergency money.
Mr Connolly says: "Everybody needs accessible cash savings to cater for any emergencies or short-term requirements, and cash Isas are the ideal products for this purpose, with savers benefiting from tax-free interest.
"Also, everybody should ideally be planning for the longer-term.
"For most people, the best approach for longer-term investments is a combination of pension and stocks and shares Isas."
He notes: "Pensions provide initial tax relief but aren’t flexible for younger people, whereas stocks and shares Isas can also be tax-efficient and provide far greater flexibility, meaning people can access their money if they need it.
"The Lifetime Isa can also play an important role in helping younger people get on the housing ladder, with government bonuses providing a boost to their savings as they try to build a mortgage deposit."
Mr Gallacher says that, despite recent changes, they can have a role to play in some more complex tax planning.
He explains: "Even if not necessarily offering any immediate tax advantages for people I still think Isas should form the start point for any investments people are thinking of building.
"This is because of that principle of building barriers between you and the taxman.
"When the 20 per cent tax credit was abolished on dividends there was an argument that Isas no longer offered a tax advantage for most people. But the implementation of the additional 7.5 per cent dividend tax for basic rate taxpayers (32.5 per cent for higher rate taxpayers) on dividends in excess of the £2,000 dividend allowance, shows how quickly tax rules can change."
He sets out: "For example, a basic rate tax-paying company director with £10,000 of salary, £30,000 of dividend income from his own business, and a £100,000 investment portfolio paying £3,000 a year in dividends, would be saving £225 a year in dividend tax by having accumulated that £100,000 within an Isa, as opposed to outside an Isa."
melanie.tringham@ft.com
