ISAs here to stay

stphnstevey

Having a thick day! - Net of tax means tax has been taken out already = you pay tax on dividends?

No higher rate tax = still pay 22% tax on any income? = pay 22% on any gain?

No CGT = No tax on any gain?

dunstonh

1 - ISAs are exempt for capital gains tax totally.
2 - They have no further liability for income tax as the tax has already been dealt with. Stock and share ISAs with corporate bonds/interest distributions can still claim the tax back.
3 - Any income generated by an stocks and shares ISA is not included towards the age allowance reduction (relevant for over 65s).
4 - The income from them doesnt count as income for pension credit means test but the capital value does.
5 - They are included in your estate for IHT purposes.

Some people do think that they shouldnt be called tax free but tax efficient.

stphnstevey

The gain on a S&S ISA is a Capital gain - so no tax that way?

But you do pay tax on any dividends?

ReportInvestor

You don't pay tax on dividends as such as a basic rate taxpayer outside an ISA.

BUT you have a dividend tax credit of 10% which I think counts on your tax form for working out your upper earnings limit.

The tax credit sort of counts for the money that Gordon has taken from company profits anyway in the form of corporation tax.

It cannot be claimed by by a non-taxpayer, an ISA holder or a pension fund (which is a change that Gordon brought about starting in April 1999).

A higher rate taxpayer outside an ISA pays an extra tax on dividends. For a £90 dividend this is £22.50 = £90 dividend grossed up to £100 to include the tax credit. Add £32.50 tax but count the £10 tax credit as tax already paid = £22.50.

BTW this does make share ISAs well worth it for higher rate taxpayers who were investing in shares anyway as they don't pay that 22.5% extra tax on their dividends. Quite apart from the avoiding having to mention them on a tax form or work out the tax on them.

Simple, innit :rolleyes: ? Thank goodness for tax calculation software for HRTs with shares outside ISAs .

cheerfulcat

The gain on a S&S ISA is a Capital gain - so no tax that way?

But you do pay tax on any dividends?

When they were first introduced, ISAs ( and PEPs before them ) were a truly tax-free wrapper in that the tax paid on the dividend could be reclaimed. This is no longer the case. But there is no further tax to pay on the dividends and no liability to capital gains tax.

EdInvestor

When you get a dividend payout from your shares, it comes with a 10% tax credit attached ( this is not an actual tax, which is why you can;t claim it back).

For basic rate taxpayers 10% tax is due on the divi, but the tax credit pays this tax for you, so nothing is due. Higher rate taxpayers have to pay 25% tax on top of the divi.

Back in the days before GB reorganised this divi tax/Advance corporation tax business, you could claim this tax credit back in an ISA, even though it wasn't a tax :rolleyes: You can't now.Regardless of this, the tax deal on divis is still much better than on interest - ie nil vs 20% for BRTs and 25% vs 40% for HRTs.

Capital gains tax is charged only on realised gains, that is you have to actually sell shares and make a profit before any tax might be due.Just holding shares that have gone up in value does not incur any tax.

In addition there is an annual CGT exemption of just under 9k per person before any gains become taxable.So effectively unless you have a very large fund and are selling shares regularly, you won't pay CGT.

However, if you are building up investments long term it's a good idea to put them in your ISA, if only ( in the early days) to avoid the chore of filling in the tax return with the dibi income.Later on, it's very worth while as anything in ISAs doesn;t count as income at all, so it doesn;t affect allowances you get in retirmenrt (which pensions do).

Hopelessly complicated, one has to agree, but the golden rule has got t5o be quite simple: go for that ISA every year.It's a use it or lose it deal.

oldfella

let me say it again

cash ISA = no tax
S&S ISA = tax is deducted at source from dividends

bulk switching helps the tax man - and we loose a long term tax benefit. imho a mix of cash ISA and S&S is the way to go

Mike

Mike

cheerfulcat

oldfella wrote:

cash ISA = no tax
S&S ISA = tax is deducted at source from dividends

And S&S ISA = tax on cash in the ISA

stphnstevey

Thanks EdInvestor and ReportInvestor for trying to explain. I'm sure I'm not the only going 'What?.......'.

Oldfella -I don't think you understand that making statements with no explaination doesn't really help. I'm sure your correct, just not seeing how you have come to this conclusions gives us no way of knowing.

Thanks everyone for bearing with me and trying to explain. But I think it's a bit complex and I will just stick to the assumption most of us make that a S&S ISA is a tax efficient way of investing in S&S's.

dunstonh

Perhaps the Govt could rename it from stocks and shares ISA to investment ISA to reflect the fact that you can put other things in them and not just stocks and shares.