Sales of stocks and shares individual savings accounts (Isas) were up 13 per cent in the 2010-11 tax year, with the average subscription up 11 per cent to £4,627, according to HM Revenue & Customs . This may be due to the fact that increases in Isa allowances have enabled investors to shelter more of their money from tax.
The annual Isa subscription limit is now £10,680 per person per tax year, of which £5,340 can be in cash. If you haven't yet been converted to Isas or need a refresher, here is a summary of what an Isa can do for you:
1. No personal tax on Isa income
Income from investments held within an Isa is free from further tax. The income tax savings are greater for higher-rate taxpayers, as shown below.
| INCOME TAX SAVINGS | Cash and fixed interest income | Dividend income |
|---|---|---|
| Basic rate taxpayer | 20 per cent | nil |
| Higher rate taxpayers | 40 per cent | 22.5 per cent |
| Additional rate taxpayers | 50 per cent | 32.5 per cent |
2. Save capital gains tax
Investments held within Isas are free from capital gains tax (CGT). Since 23 June 2010, there have been two CGT rates: after the annual exemption of £10,600, basic rate taxpayers pay CGT at 18 per cent and higher- and additional-rate taxpayers pay CGT at 28 per cent. You may think that the capital gains allowance of £10,600 would be enough for anyone, but over a lifetime Isas can amount to significant sums.
3. Shelter existing investments from future tax
Bed and Isa is where a fund or shares are sold to the value of £10,680 and then immediately re-purchased within an Isa. This can be done at the same day's price by using a fund supermarket. The sale into an Isa creates a charge to CGT, but the profit is usually lower than the CGT allowance.
4. Protect age-related allowance
Isa income does not count towards the age-related allowance 'means' test. For those over 65, the personal allowance increases from £7,474 to £9,940. However, for every £2 of income over £24,000, the additional allowance reduces by £1, being completely extinguished by the time your income reaches £28,930.
