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The '£2,332' reason to invest tax-efficiently

 
Ben Arnold
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Using a stocks and shares Isa can save considerable amounts of tax for investors (Source: Getty)

An investor who puts £5,000 each year into the UK stockmarket through an Individual Savings Account (Isa) could save £2,332 in tax over ten years, new analysis suggests.

This is because Isas offer protection from the taxman. An Isa is a tax shelter for investments, such as cash or shares.

For cash Isas, the savings interest is tax free. For “stocks and shares” Isas, investors don’t have to declare dividends or capital gains to the taxman.

Despite this generous perk some investors still hold shares or funds outside of the protection of an Isa.

Those investing greater sums than the £5,000-a-year example could be needlessly paying tens of thousands of pounds in tax.

The below table shows potential scenarios of the tax you might save by investing £5,000, £10,000 and £20,000 a year into the FTSE All-Share index through a stocks and shares Isa over ten years.


The scenarios rely on the FTSE All Share’s average return over the past 40 years, although always remember that past performance is not a guide to future performance. They also assume the portfolio owners are all higher-rate taxpayers.

“Portfolio 1” (£20,000 a year) would be worth £334,665 with dividends reinvested along the way.

If held within an Isa, the income from dividends and the gains made through any share price increases is protected from tax. Outside of the Isa, these taxes must be paid and for this portfolio (“Portfolio 2”), the tax bill would total £24,556.

The £10,000 a year portfolio (Portfolio 3) would save you £9,069 and the £5,000 a year portfolio (Portfolio 5) would save £2,332 in tax.

The analysis focuses on the new Isa allowance, which rises from £15,240 to £20,000 this week, but also takes into account that the dividend allowance for individuals, the amount that can be taken each year without paying tax, will fall from £5,000 to £2,000 from next April.

The combination of these factors from next year exacerbates the potential tax that could be needlessly paid.

The deadline for using this year's Isa allowance is midnight tonight (5 April). Investors will be handed a new annual allowance of £20,000 from tomorrow.

Investors should seek independent financial advice and tax guidance as there are other factors to consider. For example, existing investments must be sold to be put into an Isa which can trigger a capital gains tax liability. Tax rules can also change rapidly.

The numbers here merely serve to underline the wisdom of planning ahead and using all available tax allowances.

Please remember that the value of investments and the income from them may go down as well as up and investors may not get back the amounts originally invested


Important Information: The views and opinions contained herein are those of Ben Arnold, Investment Writer and may not necessarily represent views expressed or reflected in other Schroders communications, strategies or funds. This material is intended to be for information purposes only and is not intended as promotional material in any respect. The material is not intended as an offer or solicitation for the purchase or sale of any financial instrument. The material is not intended to provide and should not be relied on for accounting, legal or tax advice, or investment recommendations. Reliance should not be placed on the views and information in this document when taking individual investment and/or strategic decisions. Past performance is not a guide to future performance and may not be repeated. The value of investments and the income from them may go down as well as up and investors may not get back the amounts originally invested. All investments involve risks including the risk of possible loss of principal. Information herein is believed to be reliable but Schroders does not warrant its completeness or accuracy. Reliance should not be placed on the views and information in this document when taking individual investment and/or strategic decisions. Some information quoted was obtained from external sources we consider to be reliable. No responsibility can be accepted for errors of fact obtained from third parties, and this data may change with market conditions. This does not exclude any duty or liability that Schroders has to its customers under any regulatory system. FTSE: FTSE International Limited (“FTSE”) © FTSE 2016. “FTSE®” is a trade mark of London Stock Exchange Plc and The Financial Times Limited and is used by FTSE International Limited under licence. All rights in the FTSE indices and / or FTSE ratings vest in FTSE and/or its licensors. Neither FTSE nor its licensors accept any liability for any errors or omissions in the FTSE indices and / or FTSE ratings or underlying data. No further distribution of FTSE Data is permitted without FTSE’s express written consent. Regions/sectors shown for illustrative purposes only and should not be viewed as a recommendation to buy/sell. The opinions in this document include some forecasted views. We believe we are basing our expectations and beliefs on reasonable assumptions within the bounds of what we currently know. However, there is no guarantee than any forecasts or opinions will be realised. These views and opinions may change.

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