Isas aren’t perfect. The allowance has completely failed to keep pace with inflation since its launch in 1999 and the dividend tax credit was scrapped some years ago.
But that doesn’t mean you shouldn’t be rushing to make sure you shove this year’s full £7,000 into one before the deadline passes. You should.
Higher rate taxpayers still get a hefty tax break on dividends: instead of paying 32.5% they pay 10%. And the capital gains tax savings are important too. Sure, not many people expect to use up their full capital gains allowance of £9,200 every year but save £7,000 into an Isa every year and the gains soon add up: if you want to liquidate the lot in one go in, say, a decade you might find that you are very glad of the protection.
Anyway, given the state of the government’s finances, why take any risks with your taxes? Would you be remotely surprised if the CGT allowance was reduced in real terms over the next few years? Or if the rate suddenly changed again? Of course not. And given that these days it is hardly more expensive to have a self select Isa account than it is to have an ordinary trading account you might as well just channel as much of the money you intend to invest via an Isa as possible.
So, I’ve got my Isa – what now?
The problem this year is just deciding what on earth to do with the £7,000 once you’ve got it wrapped up in an Isa. It’s hard to buy the idea that stocks in general are cheap and it’s very hard to imagine that most markets won’t fall further before the year is out. So many investors will be wanting to hold a certain amount in cash. You can do this by just taking out a cash Isa (Egg is offering 6.05% at the moment) but for this year that means you can only put in a total of £3,000 which is a bore. And while you can then move that money into an equities Isa next year that will mean admin, which is also a bore.
Your best bet
It might be better then to simply take out an ordinary self select shares Isa (from pretty much any stock broker) and hold the cash in there for a while: you are allowed to do this as long as it is your intention to invest the money eventually. There are downsides to doing this: you have to pay tax on any interest received at 20% and most brokers do not usually pay particularly competitive rates of interest – think 4.5% rather than 6%.
On the plus side, there are a few exceptions to this, one being the 6% deal just announced by Hargreaves Lansdown: put new money in now (a minimum of £3,000) and between 7th April and 6th July 2008 they’ll pay you the equivalent of an annual rate of 6% on your money. You’ll have to pay the 20% tax on it of course but the difference between your total return on this and on a cash Isa paying 6% over the three months will amount to a grand total of £21. Cheap at the price given the convenience I’d say.
First published in The Evening Standard 11/3/08