Paying tax may be something that we all have to do, and there might not be any way to get out of it, but there’s no reason to pay more than you absolutely have to. Take your savings account as an example: chances are that if you’re over 18 and not a student, you’ll be paying tax on the interest you earn on your savings. If you have investments, you’ll most likely have to pay tax on the dividends you earn, right?
However, there are also some interesting investments that you can make that help you to beat the tax man, perfectly legally. Probably the best known, and one of the most popular examples of this, is the stocks and shares ISA. Let’s find out more…
ISA Investment – The Basics
Many people are already familiar with how a shares ISA works, but here’s a quick overview just in case. Essentially, ISAs offer you a tax-free form of savings. This means that you don’t have to pay tax on any interest or dividends you earn through your investment ISA. This means you maximise your investment and make sure your money is working is hard as it possibly can.
There are a couple of things to note when it comes to shares ISAs: there is an annual investment limit, which means you can only put a certain amount of money into your ISA in a single tax year. The current ISA allowance for 2011/2012 is £10680. You can choose to invest all of this in your shares ISA or split it and put half into a cash ISA instead – it’s up to you.
It’s also worth knowing that there are quite a few different shares ISAs around, from climate change ISAs (investing in companies that have lighter than average carbon footprints) to FTSE tracker ISAs, so it’s worth looking around to see which one would be best for you.
A good option, for many reasons…
But why should you consider investing in a shares ISA? There are lots of reasons you might want to invest your money, my friend Jason started an investment ISA after receiving some money from his family. His parents had downsized their property and, very kindly, passed some of the money they made on the sale down to their son with the aim of helping him get on the property ladder.
Of course, the property market being what it is, even his parents’ generous donation plus what he’d already saved couldn’t finance his mortgage deposit, so he decided to take the chance and go for an ISA with the aim of maximising his investment and eventually raising a deposit. In this case, he chose a FTSE all-share tracker ISA, which invests in all of the companies listed on that index.
Why that ISA? Essentially, he didn’t want to put all his eggs in one basket and was fairly new to investing so spreading the risk over a large number of companies seemed prudent. There were other options, but based on his situation and goals, he decided that one was best for him.
That’s not the only reason people consider investing in ISAs, though. You might come into money due to a competition win, a bonus from work, your own house sale or inheritance. You might be saving for a car, a holiday, your kids’ education, a rainy day… The important thing is making sure you choose the right ISA for your needs.
Is the risk worth it?
As you probably know, there is a risk attached to shares ISAs. This is because they are investments and, like any investments, they aren’t guaranteed to grow. This means it’s a good idea to evaluate the risk before taking the plunge and do some research into different ISAs to make sure you get one with a good reputation. We can’t deny that some ISAs do underperform; however, the best stocks and shares ISAs are careful about where they invest and even though the economy has seen its ups and downs of late, there are still some very good ISA success stories around.
Also, if you invest wisely, it is possible to spread the risk and limit your chances of an unfortunate investment. For example, there are bonds and gilts ISAs available, which are still investments but are lower in risk than other ISAs attached to the stock market. You could alternatively split your money between a cash ISA and a share ISA, or put some into a regular savings account so you’re limiting how much is at stake.
Plus, there is a risk in not moving your money. It’s said that people are more likely to get divorced than they are to move their bank accounts, and millions of people end up leaving their money in savings accounts where the value is actually going down due to inflation and low interest rates. There might be a risk involved with shares ISAs, but there’s still a good chance your money will grow, unlike many current and saving accounts – and if you look at the performance of many ISAs over the past three years, it’s easy to see that even in challenging circumstances, it’s still possible for significant gains to be made.