With the challenges of IR35, income sharing clampdowns and other vindictive
contractor focused attacks by HMRC, it is vital that contractors fight back
and ensure that they make use of the dwindling number of tax breaks still
available and don t pay extra tax unnecessarily.
A case in point is what you do with your hard earned salary and dividends. Rather than hold monies on savings accounts that will then generate taxable interest our clients have been able to build up a substantial 'nest egg', by using all or part of their Individual Savings Account (ISA) allowance. For over a decade now in each tax year (ending April 5th), contractors can invest up to £7,200 into this tax efficient 'wrapper'. 'ISA allowances cannot be carried forward to the next tax year and so it's a case of use it or lose it unfortunately.
In the 2009 Budget, it was announced that from the 6th April 2010, the ISA allowance will increase to £10,200. For those investors who will be 50 on the 5th April 2010, you can use up to the current £7,200 allowance for now, but can also top up with extra £:3000 after the 6th October 2009 as the new allowance will apply to you earlier and you can exploit the higher limit for 2009/10 too.
ISA investors can deposit a maximum of 50% of your allowable portion in a cash based ISA, 100% in an equity (stock market) based ISA or a mixture of both.
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 Freelancermoney would
always advise that you think in terms of a 5 year + term for the equities
portion to allow your investment to have time to grow. There are over 1000
different funds that can be invested in but we have chosen a handful of
providers that we feel comfortable with in the chosen field based on past
performance and future prospects. If you would prefer to meet one of our
advisers to discuss individual circumstances then we are happy to help. You'll
note that no one provider is strong across the board, so it's essential to be
selective in your choice of manager in the area that you have chosen to invest.
Freelancer Money strongly advises you to avoid the end of tax year rush to
invest and to begin monthly contributions instead.
Investing at the last moment at the end of the tax year may mean that you are
buying at an artificially high level as the markets are boosted merely because
of last minute Isa investors. It costs no to drip feed your Isa and it helps to
smooth out fluctuations in the markets because you are only committing a
fraction of your total investment each month. When prices take a dip you buy
more of your investment for that months contribution to make up for the fact
that the previous month's prices may have been higher. This is an excellent way
to spread the risk associated with picking the right time to invest and helps
you budget to save. Too often contractors miss out on this valuable tax break
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!)
Drop us a line and let us know which fund you would like to invest in and we
will have an application out to you that afternoon. If you have your own
preference for a fund, other than those mentioned on Freelancermoney then let us
know and we'll get the paperwork to you.
Contributions can be easily altered to suit your changing budget and you make
no commitment to the provider beyond this month's 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 often without notice and should attract far higher
interest rates from banks and building societies than a similar size investment
into one of their ordinary accounts. This unexpected generosity 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 and
they will therefore reward you for what they hope will be a longer term balance
than a normal account.
'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 but also have a degree of security to their money.
Insurance ISAs
Should you choose to invest into a combined cash and equity ISA (see decision
helper) you also have the option to place up to £1000 this year into an
insurance fund within your ISA. These funds may offer less equity exposure than
a purely stocks and shares fund and may therefore offer lower growth potential
but they can diversify into such areas as property and government bonds.
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 is taxable. You cannot access these funds before
50 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.
On a cautionary note, however, contractors must ask why the government is so
generous when we make pension investment? The answer must be that they are
giving us this incentive now so that we can provide for ourselves in retirement
realising that the state can no longer afford to do so. In this respect the
ISAs flexibility is also its drawback because there will always be the
likely-hood 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 and to try to
make pension provision for the longer term.
Click here to download our
'ISA Aid'
- a decision tree to help you work out how much you can invest, and where (RTF
Format).
It is important to understand that these investments are longer term in nature
and that the value of investments and income from them can fall as well as
rise. Past performance is also no guarantee of future performance.
If you would like to open an ISA, please read our Private Client Agreement and Contact Us. |
