We should always be keeping our gains from Her Majesty’s Revenue & Customs (legally, of course) where possible as none of us wish to pay any tax we are not obliged to do so.
Luckily for us, the UK government is very generous with offering all who have a National Insurance number the option to save cash in an Individual Savings Account (ISA) which is a tax-free account.
As private investors there is absolutely no reason to pay a
single penny to the tax man. Those who are tax residents in the UK (whether you
pay it or not) have a £20,000 allowance to be used annually.
These accounts come in two forms: cash ISAs, and Stocks & Shares ISAs. We are only able to put money into one of these accounts every tax year, up to the sum of £20,000 per annum.
Unfortunately, we cannot carry our balance over from one year to the next, so the golden rule for ISAs is ‘use it or lose it’!
Stock investing ISAs
There are two forms of ISAs that are available for stock investing. There is the Stocks & Shares ISA, and there is the Lifetime ISA.
The Stocks & Shares ISA is offered with many providers (check the fees first) of which some offer a ‘flexi-ISA’ – meaning we are able to take money out and replace this within the same tax year. To open a Stocks & Shares ISA is very simple – log on to your online broker and there will be an option to do so. Only a National Insurance number is required.
The Lifetime ISA (LISA)
The Lifetime ISA was launched in April 2017 and not initially a roaring success. As the government wishes to convince more people to save in an attempt to quell the inevitable pension crisis, savers can contribute up to £4,000 with the government adding a bonus 25%.
The makes the maximum amount of free cash per annum £1,000. Another who is over 18 and below 40 can open a LISA. The government bonus is from the age of 18 to 50, meaning that the maximum amount of free cash you can receive from the government is a whopping £33,000.
Unlike the Stocks & Shares ISA, for the Lifetime ISA there are limitations on withdrawal. The Lifetime ISA was designed to be used for savers to create a nest egg independently; however, one can cash this out when buying a home for less than £450,000, or when they turn 60. This means that if you contribute the maximum amount per year for five years before buying a house, then the government will have given you £5,000 in free money to use against the purchase of your first home.
Depending on the provider, it is possible use the cash inside the Lifetime ISA against the purchase of your first home and then keep the account open to take advantage of the benefits and cash out the account at 60. It is worth checking carefully as this tax-free account brings plenty of free upside.
Risk-free Upside Within the LISA
Another advantage of the LISA is that it offers stock market upside without having to lose any of the principal invested into the LISA. With a £4,000 deposit up to £1,000 of that could be used to invest leaving £3,000 in cash. This would mean that 100% of the invested capital could be lost with no real risk to the principal deposited as the government will top up your account with £1,000 at the end of year, with the account after bonus closing at £4,000. This amount of risk free upside can be adjusted accordingly to one’s risk profile, and investing less than 25% of the deposit would guarantee LISA growth whilst having exposure to the stock market. However, investments can go down as well as up and it is encouraged to understand the risk profile of the financial instruments before purchasing. If you are married, then your partner can also open a LISA and you can get double the amount for free.
Help to Buy ISA
When saving for a first home, the government will boost savings in a Help to Buy ISA by 25%, with a maximum bonus of £3,000 (to receive this we would need savings in the Help to Buy ISA of £12,000). As a one off we are allowed to deposit £1,200 into the ISA to jumpstart the account, and then we can save up to £200 every month. The mimumum amount required to receive a government bonus is £1,600, in which we would receive £400. To use this bonus we would need to tell our solicitor we wish to close our Help to Buy ISA and then they would apply for the bonus. The bonus cannot be used as part of the deposit, and only when the transaction is completed can we use the bonus to reduce the value of the purchase price of our first home.
Spread betting is currently tax free. This financial instrument is a derivative (which means it is derived from an underlying instrument or asset) and offers exposure to an underlying asset. In simple terms, a spread bet mimics the exposure of a share or a commodity, but without us actually owning the share or commodity.
How spread betting works is that we can trade, or ‘bet’, which way a share or a commodity will go, and we bet a certain amount per point. Spread betting is dangerous as until recently people could lose far more than what they had deposited, and even now around 80% of private investors lose spread betting. I would not recommend that you do it until you have a sound grasp of stock investing and trading. It is clearly difficult given the success rates and also the ISA allowance is more than enough to make money tax free.
If you do understand the risks, and wish to spread bet anyway, then always remember that very often 1p is equal to one point. Miscalculating exposure or adding an extra zero to the amount you wish to bet (for example, inputting 100 per point instead of 10 per point) could be the difference between opening a position you thought was £2,000 into a position now worth £20,000. If you made that mistake, and your position dropped 10%, you would then lose 100% of your intended exposure.
Always be careful when spread betting, because it has led far too many to the poorhouse.
None of the information above is investment advice – I am not a regulated investment adviser and would recommend seeking a regulated firm who can offer that advice should you have any questions.
Hargreaves Lansdown has written an excellent free guide on ISAs, including cash ISAs, Junior ISAs, Innovative Finance ISAs, and how to open and transfer ISAs from to and from different providers. Most of their free guides are rubbish, but this one clearly explains the different options available.
Hargreaves Lansdown is authorised and regulated by the Financial Conduct Authority.