With the end of the tax year on the horizon, now is the time to make sure you've made good use of your tax-free allowances. Michael Trudeau runs through the nuts and bolts of Isa and pension investment.
How much can I put in an Isa?
'New' individual savings accounts (Isas) are a more user-friendly version of the tax-efficient accounts previously in existence. The changes were introduced by chancellor George Osborne in his March 2014 Budget.
You can now put £15,000 into an Isa each tax year, split however you wish between stocks and shares and cash. This will rise in line with inflation to £15,240 in the 2015/16 tax year.
You can only have one of each type of Isa (cash and shares). If you don't use your allowance for a given tax year, you cannot carry it over to the next year.
What can I hold?
A cash Isa holds what it says on the tin - interest-paying bank or building society accounts, which may be fixed term or easy access. A stocks and shares Isa is slightly more complicated: it can hold shares traded on any recognised stock exchange, including the Alternative Investment Market (Aim).
A stocks and shares Isa can also hold any retail fund authorised by the Financial Conduct Authority, meaning unit trusts and open-ended investment companies, investment trusts, corporate bonds, government bonds, life assurance and also cash. From April 2015 a third type of Isa is planned, which will be able to hold peer-to-peer loans.
What's the tax treatment of Isa holdings?
In a stocks and shares Isa all capital gains and any interest payments are tax-free, and no further tax is payable on dividends (although 10 per cent tax is deducted at source and cannot be reclaimed). Similarly, no tax is payable on the interest received in a cash Isa.
What happens if I die?
In his 2014 Autumn Statement Osborne announced that from April, Isas can be passed on to your spouse tax free when you die, instead of their tax-free status being lost upon death.
How much can I put in a Jisa for a child?
In the 2014/15 tax year, the savings limit for a Junior Isa (Jisa) is £4,000. Anyone under 18 years old and living in the UK can have a Jisa opened in their name. Jisas are identical to Isas in terms of what can be held in them.
You can't open a Jisa if you already have a child trust fund (CTF), available to children born between September 2002 and the start of 2011; however, from April 2015 you may be allowed to transfer savings in a CTF to a Jisa.
What is the tax treatment?
Jisas are identical to Isas in terms of tax breaks. The differences are in the amount you can put in, and in access to the money.
When can the child access the money?
Although the money in a Jisa technically belongs to the child, they can only take control of the account when they turn 16, and cannot actually withdraw the money until they are 18. If the cash is not withdrawn, the account automatically becomes an adult Isa.
How is my pension treated in tax terms?
When you contribute to a pension, the government will give you tax relief at your marginal rate. So if you are a 20 per cent taxpayer and pay in £80 a month from taxed income, the government will add the tax you paid on that money, bringing it up to £100 a month.
How much can I put into my pension this tax year?
From 6 April 2014, the annual allowance for tax relief on pension savings is £40,000, including contributions made by employers. However, in contrast to an Isa, you can carry forward unused pension allowance from up to three previous tax years.
What does pension auto-enrolment mean?
Auto-enrolment is a government plan to get more people saving for retirement. Under the policy, every employer must automatically enrol all employees into an approved pension plan, and match employees' contributions to a certain limit. Employees may opt out if they have other arrangements or don't want to be a member.
What are the new pension freedoms coming into force in April?
From April 2015, you will be able to do what you like with your pension pot instead of being effectively forced to buy an annuity. You can still buy an annuity if you want to, but you could alternatively take some or all of your fund in cash. However, it will be taxed as income, so a large lump sum withdrawal would push you into the 40 per cent tax bracket.
Or you can keep your pension savings invested and draw an income from them as you please, with a quarter of each withdrawal free of tax. Additionally, from April 2015 it will be possible to inherit undrawn pension funds tax-free.
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