It is hard to cross the road without one billboard or another reminding you about the Isa deadline: squirrel away £5,340 in a cash Isa account by April 5 or lose this year’s allowance.
But a lot of Britons are failing to make the most of another side of the tax-free allowance: the stocks and shares Isa, in which they can invest £10,680 this year. Anyone who is considering using the current downturn to invest in shares should do so via an Isa tax-free “wrapper”.
The major benefits are for higher-rate taxpayers, because they would ordinarily have to pay additional tax on any dividends, but within an Isa, they are tax-free.
So a higher-rate taxpayer who was awarded £200 of dividends on standard investments would have to pay £50 of tax, but within an ISA they would not face tax. Anyone who is currently a basic-rate taxpayer but expects to cross into the higher rating should open ISAs now to benefit from the tax-free shelter later on.
You may also escape from Capital Gains Tax. This is charged on gains of more than £10,600 from the sale of shares in a tax year, so you wouldn’t normally have to pay it on a small, one-off investment, but high earners investing in ISAs for consecutives years could avoid a big bill later down the line.
So what can you invest in an ISA? Nearly anything: shares on UK registered exchanges, plus funds. Investing in equities can trigger larger returns than cash over the long term.
Graham Spooner, investment research analyst at The Share Centre, flags up Olympic caterer Compass Group as a low-risk ISA pick for the risk-adverse investors: “Compass Group has benefitted from a successful turnaround strategy, the group has some defensive qualities, with almost 50 per cent of its operations in healthcare, education and defence, and it is therefore likely to be less susceptible to economic downturns.”
For medium-risk investors, he flags up consultancy Amec. “It serves a range of industries including the transport, oil, gas and power sectors - this diversity is one of the company’s main strengths.”
Higher-risk ISA investors should look at miner Medusa, Spooner adds. “The share price has been very volatile due to the gold price and a recent tropical storm that hit infrastructure in the Philippines which limited ore haulage. However, it has risen recently on the back of the increasing gold price.”