An Easy Way To Pay Less Tax On Your Savings?

Do you like paying more tax than you have to? If not then make sure you use your ISA allowance for this year. Anyone who is saving for a particular purpose in life whether it be planning for retirement, education fees or even a holiday fund should be using at least some of their ISA allowance each year. Gordon Brown has committed to ISAs until 2010 and they are suitable for any person that pays income tax or capital gains tax.

However, there appears to be a lot of confusion surrounding ISAs and how they work which can be daunting. So it helps to understand exactly what an ISA is.

An ISA is not an investment itself, but a wrapper which allows an investment or savings to be held in a tax efficient environment. When someone is putting money into an ISA they are effectively doing two things at the same time. They are investing in some kind of financial asset and also putting a wrapper around it to protect the investment from capital gains tax and income tax.

The regulations allow various types of asset to be included in ISAs. There are basically two components to an ISA –

1)      Cash component which is similar to any other ordinary savings account other than the fact that interest is tax free.

2)      Stocks and shares part can include one or more of the following investments

?shares listed on a recognized stock exchange (except for shares on AIM),

?unit trusts,

?investment trusts,

?corporate bonds,

?fixed interest preference shares and convertible preference shares,

?European government bonds,

?fixed interest and convertible government bonds.

There are limits on how much you can invest each tax year. ISAs come in two sizes maxi and mini, and there are rules surrounding how much can be invested in each.

In the same tax year you cannot take out a mini ISA and a maxi ISA. For example it would be illegal to have a cash mini ISA and also invest in a stocks and shares maxi ISA in the same tax year. This would be allowable if the investor used mini ISAs in the preceding tax year and opted for a maxi ISA this tax year or vice versa. Additionally, you cannot take more than one mini ISA of the same type in the same tax year eg two mini cash ISAs. 

Gordon Brown has committed to ISAs until 2010. So if a married couple used their allowance of £7000 per person per tax year they could have invested £70 000 into their portfolio by 2010. It would all be exempt from capital gains tax and income tax.

Understanding how ISAs work is only part of the story. The fundamental question is what to put inside the ISA. Listed below are some of the places to get an ISA and some questions to be asking.

• Banks and building societies

• National Savings and Investments

• Financial Advisers

• Fund supermarkets and retailers.

Are they authorised to give financial advice?
Are they a company representative or an independent adviser?
How do they make money from opening and operating an ISA for you?
What are the total charges you will pay?
Why are they recommending an ISA to you and why is the tax benefit of an ISA relevant to you?
How do the costs and charges from one provider compare to others?
What components are available in the ISA (i.e. cash, stocks & shares)?