ISAs

ISAs

It’s well worth looking at ISAs.

With the challenges of IR35, Arctic systems and other vindictive contractor focused attacks by HMRC, it is vital that contractors fight back. They should ensure that they make use of the dwindling number of tax breaks still available. They shouldn’t pay extra tax unnecessarily.

In the last year 9 years many of our clients at FreelancerMoney have been able to build up a substantial ‘nest egg’. They did this using all or part of their £7000 personal allowance to invest in an Individual Savings Account (ISA).

In each tax year (ending April 5th), contractors can invest up to £7,000 into this tax efficient ‘wrapper’. ‘ISA allowances cannot be carried forward to the next tax year. So it’s a case of use it or lose it unfortunately.

You can invest in cash or in an equity (stock market) based ISA or a mixture of both. Use our ‘ISA Aid’ to work out what you can invest and whether to go for a Maxi or Mini ISA

Equity ISAs

Historically the best use of these tax breaks has been to invest in a good equity based investment such as a unit trust, investment trust or similar share based fund. Given the fluctuations of the stock market we would always advise that you consider a 5 year + term for the equities portion. That’s to allow your investment to have a chance to build up over different types of market conditions.

There are literally 1000s of different funds that can be invested in. However, we have done the legwork for you and can make recommendations based on fund providers who have shown aptitude in their chosen field. We choose those with a strong past performance and a clear vision that should deliver future growth.

You’ll note that no one provider is strong across the board. So it’s essential to be selective in your choice of manager. We will also look to blend a core share based holding with some bond and commercial property exposure. That’s to ensure that, regardless of which sectors are doing well, you should have some exposure to these too.

Monthly Contributions

We strongly advise you to avoid the end of tax year rush to invest. Instead begin monthly contributions. Investing at the last moment at the end of the tax year may mean that you are buying at an artificially high level. That’s because the markets are boosted merely because of other last-minute ISA investors.

It costs no more to drip feed your ISA. It helps to smooth out fluctuations in the markets because you are only committing a fraction of your total investment in any particular month. When prices take a dip you buy more of your investment for that months contribution. That’s to make up for the fact that the previous months prices may have been higher.

This is an excellent way to spread the risk associated with picking the right time to invest. It helps you budget to save. Too often contractors miss out on this valuable tax break. That’s because you we don’t have the cash when the March deadline appears. Ask yourself whether you’ve fallen into this trap in the past!

Contributions can be easily altered to suit your changing budget. You make no commitment to the provider beyond this months investment.

Cash ISAs

For money that you are likely to need in the shorter term or if you require complete security from the fluctuations of the stock market then a cash ISA can be accessed at any time. That’s often without notice. It should attract far higher interest rates from banks and building societies than a similar size investment into one of their ordinary accounts.

This uncharacteristic generosity by the banks is because the institutions will expect to have your money for longer. They hope that you will probably not withdraw funds sheltered in this tax break if you can help it. They will, therefore, reward you for what they hope will be a longer term balance than a normal account.

Sometimes the institutions will try to tempt savers with a headline grabbing ISA rate. That’s in the hope of encouraging you to bring all of your savings into their more profitable, less competitive, accounts.

‘Protected ISAs’

Some providers have equity based ISAs that track stock markets but that have varying degrees of protection for the underlying fund value. In this way contractors could benefit from some measure of the potential growth of equities. They also have a degree of security to their money.

Pension or ISA?

The answer is probably both if you can. Whilst pensions attract a far more lucrative initial tax boost in the form of relief at your highest marginal rate i.e. 40% (in effect the government will be putting money into your pension on top of what you contribute) they are relatively inflexible when you try to take the benefits.

Whilst you should be able to take a proportion of your fund as a tax-free cash lump sum, the income paid by the remaining fund is taxable. You cannot access these funds before 55 in most cases and eventually part of your money must be used to an annuity. With an ISA you call the shots and take the money out tax-free when you choose.

Pension Investment

On a cautionary note, however, contractors must ask why the government is so generous when you make pension investments? The answer must be that they are giving us this incentive now so that we can provide for ourselves in retirement. Thye are realising that the state can no longer afford to do so.

In this respect the ISAs flexibility is also its drawback. That’s because there will always be case that this money could be dipped into for emergencies/holidays etc and not be there to fund ‘the longest holiday of your life’.

The best answer is probably to invest in ISAs for the medium term. Try to make pension provision for the longer term.

Fully Flexible ISAs

For the first time, the Chancellor has created fully flexible ISAs. This helps contractors as it means that they can take their money out, if they are out of work, and put it back in when they are in work without losing the tax advantages for that year.

Form more info on that click on Fully Flexible for Contractors

Help to Buy ISAs

The Chancellor has also created an ISA which can be used to save up to get a Help to Buy Mortgage for first time buyers.

To find out more click on Help to Buy ISAs

It is important to understand that these investments are longer term in nature. The value of investments and income from them can fall as well as rise. Past performance is also no guarantee of future performance.

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