Time to get your tax game in order! Just a few days left before the end of the 2017/2018 tax year, on 5th April, so you need to act fast if you want to max out your tax free savings!
Why is this important? Well because everything you save, every penny, outside of the Individual Savings Account scheme, will be taxed at your current tax rate.
While you may think you don’t have a lot of money to invest, and that doesn’t make much of a difference anyway, let’s look at the numbers.
If you invest £100 this year, and make 10% on your investment, you will end up with £110 at the end of the year. But if you get taxed on that amount, you will only have £108, if you are in the 20% tax bracket. That is an effective return of 8% against 10% if you were to use a tax free vehicle like an ISA.
Let’t take this one step further, and look at how much your £100 would grow if you were to leave it for 30 years, from age 35 to 65.
£100 invested at 8% for 30 years would return £1,093.57, while £100 invested at 10% for 10 years would return £1,983.74. That’s almost double the money!
The numbers get even bigger if you are in the higher tax bracket.
Yes, that is how taxes can impact your returns, and how a seemingly unimportant rate difference of 2% every single year can add up to a huge 81% difference over the course of three decades.
In 2017/2018, the ISA allowance has increased to £20,000, from £15,240 the previous tax year. You don’t want to miss out on this amazing opportunity to grow your nest egg and legally protect it from the taxman! If you invest £20,000 this tax year and get a tax free 10% return, you will have £396,748 in 30 years, versus £218,714 if you paid 20% tax on all the accrued interest. A £178,034 difference! Do I have your attention now? Good.
If you can’t find enough money to invest in your ISA this tax year, make sure you save as much as possible starting April 5. Little amounts here and there can add up to a lot down the road, especially if they grow free of any tax.
And every year, you can add up to your ISA and save even more money, completely tax free. While you are free to add to any ISA for the next tax year, if you withdraw any money, you won’t be able to put it back, unless you are under the current tax year allowance threshold.
There are many ways to invest your money and grow it within an ISA. You can invest in cash, but interest rates are pretty low at the moment, so you would be lucky to get anything over the inflation rate, meaning your money would buy less next year than it does today. Not ideal.
You can invest in stocks and shares, and in what is called innovative finance, in order to get greater returns. Both obviously come with greater risk, but also greater reward potential. With innovative finance ISAs (IFISA), you can invest for example in peer to peer lending, and still watch your nest egg grow tax free. You can transfer any amount you currently have in old ISAs and decide to invest it differently. You will need to contact your ISA provider to make sure this is done properly and you don’t lose the tax advantage on your savings. This is particularly interesting if you have cash ISAs. Usually these will give you a great incentive to join for the first year. Then, they will revert to a standard interest rate, and with rates so low at the moment, you really want to look for better opportunities to grow your cash stash.
However you decide to invest your tax free ISA, to key point here is to get started. You don’t want the taxman to get a hold of your hard earned savings any more than he already does. ISAs are a fantastic way to shield your investments from getting taxed, legally