UK ISA Accounts

Isa Accounts

In this post i'd like to talk about Isa accounts, Isa accounts are tax free wrappers available in the UK for both investments, savings and peer to peer lending. Any capital gains, dividends or interest generated within an Isa is tax free. What makes Isa accounts unique is the fact that unlike other tax wrapper accounts such as pensions, An Isa allows its owner to withdraw money without penalty.

Limitations

Isa accounts allow their owners to put up to £20,000 in every year, after reaching the £20,000 limit, no more can be placed into an isa that year until they reset in April. Once the limit has been reset you are free to either place another £20,000 into that same account or open up an Isa somewhere else.

Although you can have more than one Isa of the same type if you pay into them on separate years, you can only pay into one Isa of the same type per year. for example if i opened a stocks and shares Isa with one provider, i would still be able to open up a savings account Isa as well, however the combined amount i put into these Isa's in one tax year cannot exceed the limit of £20,000. But if i then opened up another Isa of the same type, for example a second stocks and shares Isa, i would not be allowed to put any money into it until the next tax year arrived unless i told the provider for my first stocks and shares Isa to transfer my Isa to the second provider.

Tax on foreign companies

Although your investments in an Isa are tax free when holding companies situated in the UK, holding companies in your Isa that are situated in other parts of the world such as the USA and Europe can still leave you paying withholding tax on your dividends. 

As an example if i were to be paid a dividend from a company within the USA i automatically pay a 15% tax on the dividend, where as a company from the UK would pay me a 100% tax free dividend. I would not however have to pay capital gains tax on any company i sell within my Isa regardless of what country the company belongs to. 

Most brokers will automatically deduct the tax for you, meaning you wont have to do anything on your part when receiving income from other countries.

 

One investment can pay you a lifetime

Due to the way Isa's are setup, it is incredibly easy to simply buy and hold companies and let them generate value for you in the form of either capital gains, or dividends without having to worry about taxation. This profit can then be withdrawn as needed or re-invested to compound your gains.

Capital gains and dividends generated within your Isa do not contribute to your yearly Isa limit and so after you have grown you'r portfolio to a considerable size you can outgrow the £20,000 limit by using your dividends and capital gains generated within your Isa.

Use it or lose it

The government has the power to change the Isa limit and indeed sets a new limit every April, however for the last few years the limit has stayed at £20,000, however this can definitely change and go up as well as down. So the general consensus around Isa limit is to use it or lose it, referring to the fact that the longer you wait to start using up your Isa limit, the less you will evidently be able to put in over the long run.

With so many providers offering free Isa's there is little reason not to start putting money aside to place in these brilliant tax wrappers. You can of-course ask your provider to transfer an Isa of one type into another, for example i could have a cash Isa transferred into a stocks and shares Isa without effecting the limit of £20,000. So even if your not ready for investing quite yet, making use of your limit now can absolutely help you in the future.

If you have any more questions regarding Isa accounts feel free to contact me.