16 Feb | Stocks and Shares ISAs Explained
There are lots of ways to improve your tax efficiency, and for those who are busy considering their options, stocks and shares ISAs can be an ideal solution. These tax efficient investment instruments work in much the same way as their cash equivalent, yet those who do their research will soon discover that they offer the opportunity to receive far higher returns.
If you’d like to look into them a little further, then here’s some information to help improve your understanding…
Why Choose a Stocks and Shares ISA?
In the world of finance, two types of ISA exist. These investment instruments can take the form of either cash accounts or a stocks and shares equivalent, and both are useful for those looking to improve their tax efficiency.
Investors who choose to use cash ISAs are often gratified to learn that the savings they place within them are tax free, yet it is their stocks and shares alternative that will often deliver higher returns. These investment instruments allow those with an eye on their finances to sink their money into a wide range of assets, from unit trusts to open-ended investment companies, investment trusts, government and corporate bonds, and individual company shares.
The important difference between the two, and a key driver of each individual’s decision-making, will be the degree of risk associated with each type of ISA. Those who are more risk averse will usually choose a cash account, whereas those who are willing to gamble on the possibility of their investment going down in value, as well as up, may wish to select a stocks and shares option instead.
How Much Money Can Be Invested in a Stocks and Shares ISA?
The amount that can be invested in an ISA varies from year to year, but the current total that you can deposit in your account is £15,240. This amount can be split between both stocks and shares ISAs and cash accounts, with no maximum or minimum limits placed on this divide.
What are the Tax Advantages of Stocks and Shares ISAs?
As a rule, stocks and shares ISAs are used to improve an individual’s tax efficiency, so it should come as little surprise that numerous tax related benefits are attached to them.
When you choose a stocks and shares ISA, the dividends attached to your assets will be paid with only a 10 per cent tax deducted at source, irrespective of your tax rate.
In addition to the rule regarding dividend income, any capital gains that you make from the investments in your stocks and shares ISAs will be tax-free.
As if these benefits were not enticing enough, your interest will be tax-free. This means a saving of 20 per cent on tax for basic rate taxpayers, and savings of 40 and 45 per cent respectively for higher and additional rate taxpayers.
If you’re attempting to become more tax efficient, could a stocks and shares ISA be the perfect financial instrument for you?