Isa guide 2016: The 45p rate taxpayer
When the Isa was launched in 1999, alongside its impressive tax benefits, its virtue lay in its simplicity. And the Isa has remained a firm UK favourite ever since, with almost 14m people using the wrapper to shield their personal savings from tax. With the end of the tax year approaching, and given that, once money is contributed, it is protected from tax forever, it is advisable to make full use of this year’s £15,240 allowance.
But as George Osborne seeks to use the Isa structure to achieve his political ends, he risks making things more complicated. On the positive side, he has increased the allowance a number of times, but more problematically he has launched a raft of variations to cater to different, but not necessarily distinct, savings goals.
As the Isa grows more labyrinthine, here is how 45p rate taxpayers can navigate the maze.
A port in a storm
If your adjusted income is at least £150,000 a year, the Isa looks like a port in a storm. “It is one of the few allowances this group has which hasn’t been tapered yet,” points out Rob Burgeman, divisional director at Brewin Dolphin.
The Isa is looking increasingly attractive for this group, partly because the annual allowance will increase in 2017 from £15,240 to £20,000 a year, but also because the highest earners are facing changes which will severely restrict their savings into pensions.
Changes to pension tax relief
Changes to pension tax relief which come into effect on 6 April mean that the government will no longer give 45 per cent tax relief on all contributions up to £40,000. Instead, if you earn between £150,000 and £210,000, the amount you can put into your pension every year and get tax relief on will be subject to a “taper”. For every £2 you earn above £150,000, your annual allowance will fall by £1. So if your adjusted income is £210,000 or more, you will only receive tax relief on £10,000 of the pension contributions you make in any one tax year.
But the Isa doesn’t discriminate. “Additional rate taxpayers pay tax at 45 per cent on all their savings income outside the Isa,” says Danny Cox of Hargreaves Lansdown. “Therefore using an Isa saves £450 for every £1,000 of interest received.” Top rate taxpayers don’t benefit from the Personal Savings Allowance either.
But what about Lisa?
If you’re under 40 and can afford to put away £4,000 a year for your retirement, the incoming Lisa looks attractive. Available from 2017, you can use it to invest in stocks and shares, and the 25 per cent government top-up makes it more attractive than any other type of Isa if you’re investing for the long term.
Looking beyond the Isa
But higher earners should probably be looking beyond the Isa and pensions anyway. “If you’re able to fill an Isa and a self-invested personal pension (Sipp) each year, think about putting your income-generating funds in those tax-advantaged wrappers, and put anything which is more capital growth focused in a dealing account,” says Russ Mould, investment director at AJ Bell. This is because the chancellor’s lowering of the capital gains tax (CGT) rate to 20 per cent has widened the differential between CGT and income tax (32.5 per cent for additional rate taxpayers).
Tax-efficient investments like venture capital trusts (VCTs) and enterprise investment schemes (EIS) should be used alongside non tax-wrapped investments, says Tilney Bestinvest’s Jason Hollands. But as these are sophisticated products, it is important to get advice before putting any money in them.
This article appears in the March edition of City PM's Money magazine, which will be distributed with the paper on Thursday 31st March.