Missed the ISA Deadline?
The ISA, or Individual Savings Account, has rapidly become the UK’s favourite savings method. Its favourable tax treatment and the ease with which one can be set up have meant that savers have been flocked in their droves.
An ISA is actually a tax wrapper into which you can place other investments. The wrapper provides protection from tax for whatever it is that you want to put in it – for example cash, or stocks and shares. You have an annual ISA allowance that is renewed each year, and there is an annual scramble to make the most of the allowance before the deadline. But what if you miss the deadline, or if you have already used up your allowance? Are there other tax efficient savings methods?
ISA TypesYou should note that there are several distinct types of ISA. If you have already used up your cash ISA allowance, you might wish to investigate a stocks and shares ISA.
The allowances are significantly higher for stocks and shares ISAs, but it is important to understand that these are investments – as opposed to cash ISAs which are simply savings accounts. You can put your money into a range of investments, including government and corporate bonds, but the value of these investments might fall. The tax treatment is also different to a cash ISA; if you make only interest-bearing investments (as opposed to those that will yield a capital gain), you will pay no tax on that interest. But if you invest in shares you will probably only save money if you are a higher rate taxpayer.
Pension PlansFor a longer-term savings or investment, you should consider private pension plans. There is a huge variety of pension types on offer, and the one you choose will depend on a number of factors including the length of time before you expect to retire, and how comfortable you are with financial risk.
Personal pension plans offer tax relief ‘at source’, meaning that the provider will reclaim tax at the basic rate from HM Revenue and Customs. Relief is also available at the higher rate, but you will have to claim this separately. Personal pensions are therefore another tax efficient alternative to ISAs. But, unlike an ISA, you cash may be tied up for a significant period of time. You should make sure that you keep a buffer for emergencies if you choose to make a long-term investment of this type.
BondsFinally, given the very poor rates that many savers are currently enduring, you may wish to consider bonds. Many high street banks offer competitive rates on 3- or 5-year bonds and, while your cash will be tied up for a few years and you will not enjoy the same tax treatment granted to ISAs, you can be confident that you will be getting a far better return on your money than if it were sitting in a conventional savings account – or, worse still, in your current account.
ISAs provide an appealing opportunity to save in a tax-efficient manner. But they are not the only option for savers. If you have already used up your allocation, don’t panic – there are plenty of alternatives available.