How to keep the profits from our investments only for ourselves? ISA can be an answer

In this post, I will explain to you why it is worth to use ISA and what product I actually use.

ISA explained

If you invest, you need to think how to minimalise the taxes. To succeed in it, one of the possible ways is to use an ISA account.

In the previous post – +79.30% – great results of the 1st year of my mutual funds’ wallet  I shared with you the results of my investments using my ISA account. ISA is an Individual Savings Account, a scheme allowing individuals to hold cash, shares, and unit trusts free of tax on dividends, interest, and capital gains (according to Wikipedia).

ISA is available to UK residents. In other countries, there are similar products. Of course, there are differences in terms of how much money you can contribute to this scheme annually, what financial instruments you can buy etc.

While investing, choosing right markets/companies to invest in is, of course, vital, however, preventing money from taxes is also one of the most important issues to take care about.

Why is it beneficial for you to open an ISA?

By using ISA,  you will not pay taxes from your investments. Maybe you do not even think how capital gains tax can lower down your return from investments. In a nutshell, I think you would prefer to keep all 100% of your gains for you. Do not give away for example 20% of it to the government. The amount of the tax paid will depend on your tax band – see the summary below:

Year 2016-17
Allowance £11,100
Rate 10% or 20%, depending on your tax band, except for second homes- where rates remain 18% and 28%

You can invest, earn money and withdraw all of it – you will lose the ISA allowance for the previous years but your profits will be safe from taxes.

What are advantages of ISA in comparison to a private pension scheme?

It is not the only investing platform I use. In the UK, the other one is a retirement account.  In my current workplace, I took advantage of one of the benefits my employer offers me and I am contributing 4% of my salary while my employer’s contribution is additional 6%. As a result, the money that I contributed is being multiplied by 1.5 at the very beginning – it means that at the start of my investments I have already gained +150%. Undoubtedly, it sounds pretty good. I can invest the money by myself or leave it in the default mutual fund managed by the representatives of the financial company – in my case, by Scottish Widows. The other benefit is that the money I invest in my private pension account is invested before paying income tax.

The disadvantage, however, is that I will be able to use the money from my retirement account at the age of 55. I think that the government might want to even increase this age because of the tendency that people live longer nowadays.

I will prepare another post about investing in a private pension scheme in the nearest future.

Contrary to this retirement account,  ISA does not have this disadvantage. I want to choose the time I will need my money and ISA allows me to do it.  As a result, I do not want to contribute too much into a private pension scheme. I use only 4% of my gross salary.

Who can open an ISA?

The question you may have is if you can open it. On the government website, we can find the information:

To open an ISA you must be:

  • 16 or over for a cash ISA
  • 18 or over for a stocks and shares or innovative finance ISA
  • resident in the UK
  • a Crown servant (e.g. diplomatic or overseas civil service) or their spouse or civil partner if you don’t live in the UK

I am an adult EU passport holder, I live in the UK and there were no problems for me to open this type of account. If you can – it is worth to do it.

Where to open an ISA?

You can get an Individual Savings Account (ISA) from:

  • banks
  • building societies
  • credit unions
  • friendly societies
  • stock brokers
  • peer-to-peer lending services
  • other financial institutions

What ISA account do I use?

I opened my ISA account in AXA. It is a very good investing platform. I had quite decent results using it last year – see the link –  +79.30% – great results of the 1st year of my mutual funds’ wallet.

Some details of ISA with AXA:

  • Number of funds available: 1,300
  • Transfer out fee: £0
  • Min ISA deposit: £50 regular monthly direct debit or £500 lump-sum
  • Buying/selling funds: £0

I used this account the last year and, as you see, I could choose very good mutual funds to invest in: AXA Self Investor, however, it  does not give you an option to buy particular companies.

Other options?

There are many institutions in which you can open an ISA account. I have already made an investigation in terms of fees and investing options and it is quite probable that I will move my money to different ISA platform. The only disadvantage I see in AXA is that there is no option to invest in shares of the companies and ETFs. I prefer to buy a very good company from a stock market instead of buying a bunch of companies from the market. The proper selection can increase my profits.

I will not lose the prevention from taxes while transferring the money to another investing platform provider.

Important numbers and dates

I will let you know if I change my ISA account provider. In the meantime, I remind you to use your ISA allowance. The ISA limit 2016/17 is £15,240. Remember to use your ISA allowance until 5 April 2017.

The ISA limit 2017/18 will be £20,000. I am going to use both limits for tax benefits from my investments.

I hope I have convinced you to look for options to prevent your profits from high taxes. ISA account is not the only answer to the title question. But it is one of the simplest one and it is worth using.

While waiting for next post, let me know what investment platforms you use.

Stay tuned.

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