ISAs – the basics – 2011/12 tax year

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ISA Individual Savings Account 2011/12 tax yearHere’s a brief overview of ISAs (Individual Savings Accounts) – what you can and cannot do with them in the current 2011/12 tax year which ends on 5th April 2012.

What is an ISA?

An ISA (Individual Savings Account) is a tax-efficient form of saving or investment. It is tax-efficient in terms of income and capital gains tax. The actual rules are beyond the scope of this quick article but check the HMRC website for more info if needed. Basically, the are tax free in terms of income and capital gains taxes in your hands.

An ISA will be included in calculating your Estate value for probate and inheritance tax purposes.

What different types of ISA are there?

There are two types of ISA:

1. Cash ISA – a savings or deposit account on which interest is paid tax-free.

2. Stocks and Shares ISA – this is a an ISA which invests (normally through the investors own choice) in mutual funds (collection of shares managed by a fund manager) or directly into individual company shares.

Self-select ISAs allow you to choose your own funds and/or shares. Seek advice from an Independent Financial Adviser (IFA) if you’re not sure where to invest.

Investment Limits

Basically…..

1. Up to £10,680 in a Stocks and Shares ISA.

OR

2. Up to £5,340 can be invested in a Cash ISA with any unused allowance being available for a Stocks and Shares ISA. E.g. if you put £2,000 into a Cash ISA you can still put £8,680 into a Stocks and Shares ISA.

Can I Transfer from one ISA provider to another?

Yes – approach the company to whom you wish to transfer to arrange this. Under no circumstances surrender the ISA in order to reinvest it. To retain its tax-efficient status, the transfer must be conducted by the plan managers – you will lose the tax-efficient benefits if you surrender an existing ISA 🙁

If I transfer an “old” ISA does this use my current years’ ISA allowance?

No – each individual has a new personal ISA allowance on 6th April each tax year, regardless of any previous ISA investment they may have made.

Can a husband and wife have their own ISA’s?

Yes, everyone aged over 18 has there own personal ISA allowance. It is currently £10,680 for the 2011/12 tax year. Joint ISAs are not allowed.

If I take out a Cash ISA and a Stocks and Shares ISA do they have to be with the same provider?

No. You can have a Cash ISA with your bank or building society AND a Stocks and Shares ISA with a separate investment house.

Is there any risk involved?

Cash ISA – generally no – if the bank or building society were to “default” then you should be covered by the Financial Services Compensation Scheme (FSCS). In terms of returns, there is no volatility involved as this is purely a deposit/bank account.

Stocks and Shares ISA – these do carry risk – the level of risk will depend on the fund(s) you invest in – some funds are risker than others and many investors like to have a spread of funds from different fund management companies and in different geographical sectors (e.g. UK. Europe, Far East etc…) or asset classes (technology, gold, oil etc…)

More information on the compensation schemes can be found at FSCS – please note you cannot claim on the FSCS if your plan simply falls in value due to poor fund choice or investment market conditions!!!

If you have any comments or questions please let me know in the comments section below.

Remember though – we don’t give financial advice on this site!

ISA Allowances 2011/12 Tax Year

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At midnight tonight the new 2011/12 tax year starts!

ISA allowances are increasing from £10,200 to £10,680.

Of this £10,680, up to £5,340 can be invested in a Cash ISA, and any unused allowance between the amount you put into a Cash ISA and the overall allowance of £10,680 can be invested in a Stocks and Shares ISA.

For example, invest £2,000 in a Cash ISA from midnight tonight and you can still invest up to £8,680 into a Stocks and Shares ISA.

If you can afford to invest on a monthly basis, to benefit from pound cost averaging, the maximum each month (assuming 12 payments) is £890.

Any questions, add them below and I’ll answer them for you.

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ISAs – the basics – 2010/11 tax year

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It’s that time of year again – as the end of another tax year approaches on 5th April we are now well and truly into “ISA Season”!

Here’s a brief overview of ISAs for those new to this form of savings/investment, as well as for those who may have a few queries they need answers to.

What is an ISA?

An ISA (Individual Savings Account) is a tax-efficient form of saving or investment. It is tax-efficient in terms of income and capital gains tax. The actual rules are beyond the scope of this quick article but check the HMRC website for more info if needed.

An ISA will be included in calculating your Estate value for probate and inheritance tax purposes.

What different types of ISA are there?

There are two types of ISA:

1. Cash ISA – a savings or deposit account on which interest is paid tax-free.

2. Stocks and Shares ISA – this is a an ISA which invests (normally through the investors own choice) in mutual funds (collection of shares managed by a fund manager) or directly into individual company shares.

Self-select ISA’s allow you to choose your own funds and/or shares. If you don’t feel confident enough to make your own fund choice then consult an Independent Financial Adviser.

Investment Limits

Basically…..

1. Up to £10,200 in a Stocks and Shares ISA.

OR

2. Up to £5,100 can be invested in a Cash ISA with any unused allowance being available for a Stocks and Shares ISA. E.g. if you put £3,000 into a Cash ISA you can still put £7,200 into a Stocks and Shares ISA.

Can I Transfer from one ISA provider to another?

Yes – approach the company to whom you wish to transfer to arrange this. Under no circumstances surrender the ISA in order to reinvest it – the transfer must be conducted by the plan managers – you will lose the tax-efficient benefits if you surrender an existing ISA!!!

If I transfer an “old” ISA does this use my current years ISA allowance?

No

Can a husband and wife have their own ISA’s?

Yes, everyone aged over 18 has there own personal ISA allowance. It is currently £10,200 and this is increasing to £10,680 next year from 6th April.

If I take out a Cash ISA and a Stocks and Shares ISA do they have to be with the same provider?

No. You can have a Cash ISA with your bank or building society AND a Stocks and Shares ISA with a separate investment house.

Is there any risk involved?

Cash ISA – generally no – if the bank or building society were to “default” then you should be covered by the Financial Services Compensation Scheme (FSCS). In terms of returns, there is no volatility involved as this is purely a deposit/bank account.

Stocks and Shares ISA – these do carry risk – the level of risk will depend on the fund(s) you invest in – some funds are risker than others and many investors like to have a spread of funds from different fund management companies and in different geographical sectors (e.g. UK. Europe, Far East etc…) or asset classes (technology, gold, oil etc…)

More information on the compensation schemes can be found at FSCS – please note you cannot claim on the FSCS if your plan simply falls in value due to poor fund choice or investment market conditions!!!

If you have any comments or questions please let me know in the comments section below.

Remember though – we don’t give financial advice on this site!

Warning – HMRC Tax Refund Email Scam?

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This evening I received an email purportedly to be from HMRC in respect of a tax refund.

The opening to the email is as follows:

“Dear Applicant

We have reviwed your tax return and our calculations of your last years accounts a tax refund of GBP 178.25 is due.”

You will notice that there are errors in that sentence – “reviwed” is spelt incorrectly and “our calculations of your last years accounts….” is just awful grammar. Surely they have missed out some words.

There was a form attached to the email (no doubt asking for my banking details!) but thankfully Outlook placed the email into the Junk E-mail folder.

HMRC are aware of this scam – see this page on the HMRC site.

It would appear that this phishing scam has been around for quite a while as there is an article by Rob over at the moneywatch blog on this very issue back in 2009.

Please pass this on and don’t fall for it – you could find your bank account emptied very quickly!

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Deposit Guarantee Limit increases to £85,000

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The Financial Services Authority has confirmed that the compensation limit for depositors will increase from £50,000 to £85,000. This increase in the limit came into effect from 31st December 2010.

This is the Sterling equivalent of the €100,000 compensation limit which comes into force within the European Economic Area (EEA) on the same date.

The new increased limit applies per individual, per authorised firm.

In addition, other areas also addressed included:

  • Faster payouts – most payouts should be made within 7 days with any outstanding ones made within a maximum of 20 days.
  • Gross Payout – this ring fences savings of those individuals who also have loans outstanding with the same institution – under current rules any deposit could be offset against liability outstanding before paying out any funds remaining to the individual account holder.

Further information on the recent changes can be found on the FSA website.

UK depositor protection is administered by the FSCS (Financial Services Compensation Scheme).

Although the new increased limit is welcomed it would be a shrewd move for those with large sums on deposit to ensure they hold no more than £85,000 with any one institution.

ISA’s for Children – an introduction

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The Government has announced that a “Junior ISA” for children will be launched to replace the previous “child trust funds” which have been scrapped.

The new “Junior ISA’s” are likely to come into force in Autumn 2011 and information on them is limited at present.

The new ISA will be a simple and tax-free way for parents to save for a child’s future – the only difference being here that there will be no contribution made from the public purse!

It is understood the ISA will pass to the child on reaching 18 so could be a good way to build a tax-efficient fund for, say, university funding, house purchase or buying a home.

Remember: everyone has a personal income tax allowance – even children. For the 2010-11 tax year it is £6,475 – so if your children currently earn interest on their savings accounts (and their income from all sources if below £6,475) then they can register to receive their savings account interest paid gross with no tax deducted – here’s an article I wrote on this issue previously.

The details are to be confirmed soon but I would expect that a Junior ISA can be rolled over into an “adult” ISA once the child reaches 18 – it’s going to be a case of “use it or lose it”.

Subscribe to my free newsletter to be kept informed on developments in this area.

Download Free Yearplanner for 2011

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Back by popular demand is the 2011 A4 Year Planner.

The 2010 version proved exceptionally popular and I have received many email asking for a new one for 2011.

Download now!

It pays to plan ahead – holidays, work, school holidays, birthdays etc.

To use simply print off as many copies as you like – the 2011 year planner fits nicely on a piece of A4 paper in landscape view.

Please feel free to pass this yearplanner on to friends and family – I am sure they will find it most useful!

p.s. please note that the “thick” lines which appear between the days of the month do not show up when the yearplanner is printed!

Click here to download 2011 Year Planner

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Personal Finance Management (PFM) Tools in the UK

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I have just been reading an interesting article by Rob over at money-watch.co.uk about Personal Finance Management (PFM) tools available to us in the UK.

Personally I have been using Microsoft Money for over a decade to manage my personal finances, which, together with my personal spreadsheets which have developed over the years, seem to serve me pretty well!

Unfortunately it would appear that the MS Money software has been discontinued in the UK but the version I used is still available from Amazon.

It would however appear that these services are now moving online – which is a natural progression since most of our personal financial activity seems to occur online these days – online banking, managing our ISA/Unit Trust/Sipp portfolios as well as managing our credit cards and various other financial commitments.

Anyway – be sure to check out Rob’s article – the first in a series.

Increase your Wealth – Take a Pay Cut!

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It may sound like a crazy notion to increase your personal wealth by taking a pay cut – however can that work?

It’s simple really.

Most people have a limited income yet infinite needs and wants. They earn a fixed amount, or the household has a fixed monthly income, they spend, spend, spend first and save what is left over. I will be the first to admit that I used to “waste” money each and every month – bottled water (!), pre-packed sandwiches, not shopping around for more competitive insurance/utilities etc….

Result = there is rarely anything left over at the end of each month – “which runs out first, the month or the pay packet?”

It has been quoted many times (such as in The Richest Man in Babylon – a great book and worth the £3.46 price tag!) that those who build lasting wealth are those who SAVE first and then SPEND what is left.

By taking something off the top of each pay packet you can set this aside, firstly to build a “rainy day fund”, and then to consider medium and long-term investments.

It will be difficult at first as the decrease in monthly income can be noticeable, but over time, your spending patterns will be altered to match your new “lower” income level and quite quickly you will notice the increase in your personal wealth.

How Noticeable Will This Be?

If you set aside just £50 per month, and invest it to receive a net return of 5% per annum (which should be achievable) over a ten year period this will grow to £7,764.

If you could achieve 7% net per annum, this would amount to £8,654; which if continued for a further 10 years would £26,046.

The more you save, the quicker it will grow.

My Experience

I am fortunate in that I earn a decent income and am able to set aside £700 per month. If I continue this level of investment, I am currently on course to achieve full financial independence by the time I am 50.

It’s hard at first, but after a while your lifestyle adapts to the “pay cut” you choose – I find I now plan purchases ahead – I got rid of my credit cards – it’s addictive (although I do still enjoy life to the maximum – I just don’t waste money any longer!).

Where Should You Start?

Simple really – just keep a track of what/where your money goes on a regular basis for the next month or so – then analyse and be strict with yourself –

  • Do I really need to spend money on this item?
  • Is there a more cost-effective alternative?
  • What changes can I make in my lifestyle now to build the future I want rather than the future I currently have in-store?

Let me know you’re successes in “taking a pay cut” below.

Some end of tax year planning ideas – 5th April 2010

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The end of another tax year is steaming towards us with the 2009/2010 tax year ending on 5th April 2010.

Here’s a quick rundown of the main areas for consideration – hopefully this list may jog your memory or form the basis for you to have a meaningful conversation with your financial adviser, solicitor or accountant!

ISA’s

Under current rules, over 50’s can invest up to £10,200 in a Stocks and Shares ISA before 5th April 2010. Of this £10,200, up to £5,100 can be invested in a Cash ISA.

Under 50’s are currently limited to £7,200 in a Stocks and Shares ISA, of which up to £3,600 can be placed in a Cash ISA.

More articles on ISA’s

Pensions – Retiring Early

The minimum age for taking benefits from a personal pension plan (PPP) increases to 55 from 6th April 2010. Until then it is possible to take your personal pension plan from age 50. So if you’re in that window of people who are aged over 50 but under 54 before the end of the tax year and you wish to take your pension benefits early you need to talk to your financial adviser or pension provider pretty smartish!!

I wrote a more in depth article on this topic here – change in retirement age from 50 to 55 for pensions.

Pension Contributions

Generally everyone can contribute up to 100% of salary/income to a personal pension plan, or up to £3,600 gross if your a non-earner (housewife/husband, children etc…).

Pension plans are available for anyone under the age of 75. Pensions have a number of tax benefits. You generally receive tax relief on the money you invest – and this is provided at basic rate up front e.g. invest £80 and you actually have £100 credited to your pension plan. Non-taxpayers also get this tax relief – money for nothing from the Inland Revenue – surely this can’t be true!!

Pension funds grow in a tax-efficient manner and, under current rules, you can take 25% of the fund as a tax-free lump sum at retirement (ages 55 to 75 from 6th April 2010) with the remainder of the fund used to provide an income, in one form or other, for the remainder of your retirement. This income from your pension is generally taxed as income.

A pension plan is a long-term commitment so seek independent financial advice before investing.

Pension Contributions, Investment Bonds and Higher Rate Taxpayers

Also, if you’ve made a chargeable gain on disposal of an investment bond and you are a higher rate taxpayer it may be able to offset the additional 20% tax liability by making a contribution to a personal pension plan – the contribution has the effect of extending the basic rate tax bracket and therefore, through careful planning, if may be possible to avoid paying this additional tax on surrender after carrying out a “top slicing” calculation.

See a technically-competent financial adviser!

Capital Gains Tax (CGT)

Each person has a capital gains tax allowance (£10,100 for the current tax year) which means you can make gains on the sale or disposal of certain taxable assets of up to £10,100 before 5th April and pay no tax. Any gain over and above this are currently taxed at 18% – although this could change.

I normally think of the CGT allowance as the “unused allowance” as many people are not aware it is there but it can be a useful tool for planning your tax affairs if you have such investments as shares held directly in a limited company, etc.

 Naturally you should consult a tax expert before making any disposals to ensure that the allowance can be used properly – phone your accountant as soon as possible!

Bed and ISA – using your CGT allowance wisely

This CGT allowance lends itself ideally for anyone holding unit trusts as it generally allows a person to surrender unit trust and reinvest in an ISA tax wrapper before the end of the year without any tax to pay now, or on any future gains under the ISA wrapper.

Make Tax-Free Gifts to Reduce Inheritance Tax

This subject is generally beyond the scope of this article (I am trying to get this article published as soon as possible as I have been away on holiday!). HMRC (The Inland Revenue) have detailed information on allowances, reliefs and gifts to reduce your IHT liability here.

Transfer of Income Producing Assets

Both husband and wife have their own personal allowances for income tax and often it is the case that one or other partner has all the income-producing assets in their own name. The HMRC website gives details of personal income tax allowances for the 2009/2010 tax year – moving funds between husband and wife can sometimes reduce your tax burden.

Finally…….Tax Year End falls on a Bank Holiday – act soon and avoid disappointment!

Don’t forget – 5th April 2010 this year falls on Easter Monday – so with Friday 2nd April being Good Friday (both days being Bank Holidays remember!) it would be prudent to ensure all planning, ISA’s etc are completed well in advance of say 1st April!!!! Don’t leave it too late!

Remember, this site doesn’t give financial adviser – make sure your consult a suitably qualified independent financial adviser or accountant before taking any end of tax year financial planning actions which you are not sure about.