The Practical Guide to Limited Company Tax
If you have chosen to operate your business as a limited com...
By Jonathan London on 31st July 2014
Individual Savings Accounts are one of the most handy financial tools contractors can utilise.
At their core, ISAs are a tax free way to save money, and they are split into two types: cash and stocks and shares.
Individuals are entitled to subscribe to one cash ISA and one stocks and shares ISA during every year.
Cash ISAs operate in essentially the same way as a standard savings account, except the interest received isn’t taxed. With a standard savings account, basic rate taxpayers sacrifice around 20 per cent of the interest their money generates to the government.
For higher rate taxpayers, this jumps to 40 and even 50 per cent. By utilising a cash ISA, you can keep all the interest your money earns.
Stocks and shares ISAs, on the other hand, enable people to invest their money in equities, bonds or commercial property without paying personal tax on any returns from this. Instead of shelling out for capital gains tax once profits have hit a certain threshold, the gains you make are yours to keep, although you do pay a reduced amount on dividends.
Chancellor George Osborne announced a raft of changes to ISAs in his Budget 2014. Cash and stocks ISAs are to be merged into one product, and the annual cap upped from £11,520 to £15,000 in July.
These new rules have seen ISAs be named New ISAs – or ‘Nisas’ – by the government.
It is clear that ISAs are a very valuable financial tool for anyone trying to save a bit of money – and they can come in especially handy for contractors.
One reason for this is that due to the nature of contracting, freelancers’ income flow is often unsteady. This means it is significantly more important for contractors to save money in case of a rainy day.
Using an ISA means you might have more money than you otherwise would to get you through the in between-contract times, and it means that when you are feeling flush, you can put a decent percentage of your money away, confident that you’re getting the best deal on it.
There are a few different types of ISA – and you need to make sure you have all the information before you pick one out.
People choosing cash ISAs have two different options to consider: variable rate and fixed rate.
A variable rate ISA is where the interest rate can move up and down. These are usually easy access, and allow the individual to get their money instantly, or within a short notice period.
A fixed rate ISA, on the other hand, offers higher rates but also tend to restrict the number of withdrawals an individual can make during the year, or have a notice period for taking money out of the account.
The two forms of stocks and shares ISAs are self-select and managed. The self-select options is where you are in control and choose where to put your money, while a managed account means you have someone else to manage the investments for you.
We’ve outlined the difference between cash ISAs and stocks and shares ISAs – but which is the best?
The answer is there is no best option – it depends on your circumstances, as well as your attitude to risk.
Small investors who won’t use their capital gains allowance, and invest in shares instead of bonds could find they gain more tax using their cash ISAs right up to the cap.
However, higher taxpayers with dividend income could benefit from splitting the allowance and investing in both types of ISA. Ultimately, the more money you put in, the more you’re likely to get out, so it’s worth maxing out your allowance if it is within your means to do so.
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