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Any individual, who is an income tax payer and has money to save or invest should always consider the use of an Individual Savings Accounts (ISA). Available since April 1999, ISAs offer an attractive tax-free shelter for capital to anyone aged 18 or over (16 or over for cash ISAs).

You may have noticed that with the start of a new tax year we appear to be back to the annual banking advertisements advising us that we should now be starting up our new ISA, and letting us know how easy it is to save with their institution. However it appears to me that little attention is given to what is actually held within the ISA. In the past I have spoken to people who have said they “don’t like ISAs” and “PEPs were better”, but this is generally only a reflection on the investment markets at the time. ISAs merely serve as a ‘wrapper’ to protect savings from tax, allowing individuals to invest monies each tax year in a range of savings and/or investments and pay no personal tax on the income or profits received. Due to the benefit of the tax efficient status of these accounts, ISAs are rightly subject to strict contribution limits each year – For the current tax year, this is limited to an overall maximum of £11,520; with up to £5,760 in cash. However, for couples, as both husband and wife are treated as separate individuals, they both may fully subscribe to separate ISAs in their own name and so sheltering up to £23,040 from tax in this tax year alone.

This all sounds very good, BUT…….with cash ISA interest rates at all-time lows and with the rate of inflation well ahead of the rate of interest paid then in real terms cash ISA accounts are losing value, even allowing for the fact that they are tax free.

Depositors are therefore beginning to look into alternative investment solutions to generate a better return on their funds. I have often found that when I meet a client for the first time, they have accumulated a number of ISAs with different banks and investment providers, merely because they were doing well at the time and may not have looked at their performance for number of years. It appears to me that they are often looked at in isolation and not necessarily as part of the ‘whole picture’ which can sometimes lead to disappointment should the capital have been invested in accounts with too much risk, or in accounts with very low returns.

In view of the fact that you can shelter a considerable amount from tax over a working lifetime, ISAs are a very valuable component in a well-constructed financial plan. However as with all matters in financial planning, it is equally important to ensure that all of your savings and investments are working towards the same goal. Should you find yourself in the position of having a number of ISA accounts, and/or wanting to know how they can work for you, then give us a call and we can set you on the right path.

Please note that while any investment returns received within ISA’s will be largely tax free, the tax credit on dividend income received by the fund is not recoverable.

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