New Tax Year, New ISA Allowance - Use It or Lose It!
ISAs are essentially a tax-free savings scheme available to all UK resident doctors. The returns from ISA savings - interest, dividends and capital gains - are free from further UK tax and do not even have to be entered on a tax return for this reason. Tax-free withdrawals can be made at any time.
The new ISA allowance for 2017/18 is £20,000. Any unused allowance at the end of the year cannot be carried over to the next tax year.
The benefits of using the ISA allowance can add up: a married couple who jointly saved the maximum ISA allowance over the last 10 years would have a fund of almost £500,000 with fund growth of 5% compound per annum. However, please note that stocks and shares investments are not guaranteed and can go down as well as up in value.
As ISAs are flexible, tax-efficient and offer a wide range of investments, they are often the first port of call for any doctor with money to save or invest. The tax benefits are particularly valuable for higher rate and additional rate paying doctors, and for those doctors saving for retirement who have already reached their pension annual allowance. Remember, though, that tax rules are subject to change and the value of any benefits depends on individual circumstances.
Here we look at some of the common financial planning uses of the 'good old ISA'!
As a Cash Reserve
Most doctors will (and all doctors should) keep some cash in an easy access account for use in an emergency and to cover any short term planned expenses. This cash, if held in a Cash ISA, will accrue interest tax-free.
Under a recent amendment to the ISA rules if any of the cash is taken out to cover a short term need, ISA-saving doctors can later replace the cash in the same tax year without the replacement counting towards their annual ISA subscription limit. Not all Cash ISAs offer this flexibility though so check with the provider.
To Generate an Income
Interest rates on cash are currently low, but Stocks & Shares ISAs offer the prospect of investment income (e.g. dividends from shares and interest from bonds) along with capital growth to offset the effects of inflation. Outside of an ISA, dividend income is subject to tax in the hands of the individual doctor if the total amount received is more than the dividend allowance of £5,000. Dividends of any amount received on investments held within an ISA are tax-free.
Note stocks and shares involve investment risk and both income and capital can go down as well as up in value.
To Invest for Growth
Stocks and shares, whether held directly or via a unit trust, are asset-backed investments and offer the potential for capital growth. As any capital growth is not taxable within an ISA this is particularly attractive to a doctor who is already using his/her capital gains tax exemption, although note that losses also cannot be claimed.
ISAs can be used for regular savings as well as one-off lump sums. Doctors who can put some money away each month in a Stocks & Shares ISA will benefit from 'pound cost averaging'. This is a term to describe how, when making regular contributions, more units/shares are purchased in months when investment values have fallen than in months when investment values are higher. When investment values later (hopefully) rise, there are more units/shares to participate in the gain than if all the money was invested when prices were higher. All the gain is tax-free within an ISA. This is a way of potentially benefiting from the volatility (ups and downs) of stock markets and as such is relevant to doctors investing in equities, for instance, where large changes in price can quickly occur.
Planning for Education Costs or Other Future Expenses
Whenever substantial future expenditure is envisaged (e.g. school or university fees, a wedding or property purchase) and funds do not or will not exist to meet the expenditure there is no alternative to either saving in advance or borrowing at the time of need. As income and growth roll up tax-free within an ISA and tax-free withdrawals can be taken at any time, ISAs should be seriously considered as a flexible simple savings option.
This article does not constitute personalised advice on the suitability of an ISA. If you would like to discuss using your ISA allowance for 2017/18 with a financial adviser please contact Richard Higgs CFP FPFS on email@example.com or 0117 966 5699.