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Where to start ? Stocks and Shares ISA
Comments
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Also search the forum for snowman's spreadsheet which can help finding the cheapest broker.
Link to snowman SS in post 1 of this thread: https://forums.moneysavingexpert.com/discussion/31539420 -
One point about S&S ISAs is that the dividends are taxable at the usual 10% rate unlike cash ISAs where the interest is tax free. This isn't too clearly spelled out. Of course any capital gains on S&S ISAs are free of tax but then the annual CGT exemption is pretty generous anyway. Overall I feel that S&S ISAs aren't that good a deal but then cash ISAs are a poor buy with current interest rates. All very difficult.
I am mightily confused by this statement. Here's an extract from HMRC's FAQ on ISAs, which seems to completely contradict this. Is reeac just talking about 10% notional tax which will generally be cancelled out by the 10% notional tax credit? I don't get it.
Q. What are the tax benefits of an ISA?
A. You pay no tax on any of the income you receive from your ISA savings and investments. This includes dividends, interest and bonuses.
You pay no tax on capital gains arising on your ISA investments (losses on ISA investments cannot be allowed for Capital Gains Tax purposes against capital gains outside your ISA).
The insurer does not have to pay tax on income and capital gains on investments used to back your ISA life insurance policies. You do not have to pay any tax when the policy pays out.
You can take your money out at any time without losing tax relief.
You do not have to declare income and capital gains from ISA savings and investments or even tell your tax office that you have an ISA.0 -
I am mightily confused by this statement. Here's an extract from HMRC's FAQ on ISAs, which seems to completely contradict this. Is reeac just talking about 10% notional tax which will generally be cancelled out by the 10% notional tax credit? I don't get it.
Yes. There is no longer the ability to claim back the tax credit on dividend payments inside ISAs but there is no further tax to pay.One point about S&S ISAs is that the dividends are taxable at the usual 10% rate unlike cash ISAs where the interest is tax free. This isn't too clearly spelled out. Of course any capital gains on S&S ISAs are free of tax but then the annual CGT exemption is pretty generous anyway.
Dividends are not taxable. You just cannot reclaim the tax credit back on any dividends received inside an ISA - or indeed outside an ISA either.
However if you are a higher rate taxpayer there is no further tax to pay inside an ISA. CGT may not be an issue for a while with a single year's S&S ISA allowance but after 10 years maxing them out you'd have over £100k invested without even looking at growth/income that could start to be an issue.
As an ISA doesn't cost any more it seems to me far better to protect the investments inside it for future and any possible change of circumstances that may make you liable for tax either as 40% or as CGT.Remember the saying: if it looks too good to be true it almost certainly is.0 -
Basically, dividends are not taxable in an ISA at all.I am mightily confused by this statement.
For a basic rate taxpayer, outside an ISA, UK dividends are not taxable either, because basic rate taxpayers get a tax credit for UK and certain overseas dividends which covers it with nothing further to pay.
For a higher rate taxpayer, outside an ISA, the tax credit does not fully cover high rate tax so there would be something further to pay and the ISA is very useful.
If you were a basic rate taxpayer there would be no massive advantage to using an ISA for your shares or funds that produce dividends - other than the growth over time will increase the overall size of your tax wrapper. The main advantage is on capital gains exemption and avoiding of reporting to HMRC. If you were a high rate taxpayer there would be more of an advantage because you get all that plus a savings on dividend tax.
Going a bit off-topic but worth considering: If you were investing in some funds producing dividends, and some funds producing interest (e.g. bond funds), and you were running out of ISA space, it would be worth considering putting the bond funds in the ISA where they can save you the tax on the interest, rather than putting the dividend funds in the ISA where they would not do much for you as a low rate taxpayer (and would not do quite as much for you as a high rate taxpayer).
The downside of filling your ISA with bond funds is that they do not grow as much as equity funds and so in 20 years time you are likely to have a smaller overall pot inside the ISA which is not great for whatever opportunities you have at that point.0 -
bowlhead99 wrote: »Basically, dividends are not taxable in an ISA at all.
If you were a basic rate taxpayer there would be no massive advantage to using an ISA for your shares or funds that produce dividends - other than the growth over time will increase the overall size of your tax wrapper. The main advantage is on capital gains exemption and avoiding of reporting to HMRC. If you were a high rate taxpayer there would be more of an advantage because you get all that plus a savings on dividend tax.
The first sentence seems contrary to the next para. Are S&S ISA dividends taxed or not? Let's just consider an investor who pays basic rate tax. Googling the matter one can get either "yes" or "no".0 -
Are S&S ISA dividends taxed or not?
10% gets withheld at source, regardless of whether the dividend will be paid into an ISA or not. No further tax is due on the amount that gets paid into your ISA.
Example: Dividend is £100. £90 gets paid into your ISA. You will not need to pay any tax on the £90 since everything inside the ISA is tax free.0 -
It is not contrary.
The first sentence seems contrary to the next para. Are S&S ISA dividends taxed or not? Let's just consider an investor who pays basic rate tax. Googling the matter one can get either "yes" or "no".bowlhead99 wrote: »Basically, dividends are not taxable in an ISA at all.
If you were a basic rate taxpayer there would be no massive advantage to using an ISA for your shares or funds that produce dividends - other than the growth over time will increase the overall size of your tax wrapper. The main advantage is on capital gains exemption and avoiding of reporting to HMRC. If you were a high rate taxpayer there would be more of an advantage because you get all that plus a savings on dividend tax.
Let's look at the first sentence.
No taxpayer, whether high or low or zero rate taxpayer, will ever pay a penny of tax on dividends received in an ISA. The tax is zilch, nada. Dividends are not taxable in ISAs, nor for that matter are they taxable in pensions. An ISA, like a pension, is a tax exempt savings vehicle with a forcefield around it. The tax man cannot see inside to see what income you have received, what gains you have made. He does not charge you any tax on interest, on dividend income, on gains. He does not require you to produce any records explaining whether your ISA pot grew in value due to dividends or gains. He will never take any tax from you.
OK? Are we clear that you do not have to pay tax on dividends you receive in an ISA? Good, let's go on.
The second paragraph you quoted explains that if you were a basic rate taxpayer, investing in dividend-producing funds or shares, there is no massive advantage in using an ISA to protect you from dividend tax.
You are wondering why is that, if there is no dividend tax payable in an ISA? Surely it is better to invest in an ISA to save the tax, because you have just read that inside the ISA, there is no dividend tax?
Well, that is explained by my paragraph earlier which you snipped out, which went like this:
So, nobody pays tax on dividends in an ISA. But if you are only a basic rate taxpayer, you will not pay any tax on dividends outside an ISA either. The taxman gives you a tax credit which fully clears your liability. Effectively he deems that the company paying you the dividends has already paid its corporation tax in getting to a smaller amount of profit after tax, so doesn't want to tax you so harshly when you receive the dividend, because he has already taken a slice.For a basic rate taxpayer, outside an ISA, UK dividends are not taxable either, because basic rate taxpayers get a tax credit for UK and certain overseas dividends which covers it, with nothing further to pay.
So he gives you a tax credit which, for a basicrate taxpayer, fully covers the tax that would have been due. As a basic rate taxpayer outside an ISA, you receive say £90 of dividends via cheque. Cash it, spend it, do what you like with it, you will not need to give anything to the taxman.
As a basic rate taxpayer inside an ISA, you receive the £90 inside your investment account. Buy new investments, take some of it out as cash, do what you like with it, you will not need to give anything to the taxman.
The other paragraph that you snipped was that for a higher rate taxpayer, outside an ISA, the tax credit does not fully cover high rate tax so there would be something further to pay and the ISA is very useful. Outside the ISA you would have got a £90 cheque but have to go and pay some tax. Inside the ISA you get the £90 and you can use the whole £90 to buy new investments, take some or all or it out as cash, do what you like.
Does that cover it?
So if you're investing in funds outside an ISA, and you have the space available within your annual subscription limits for ISA, you might as well put them in the ISA, even if you are a basic rate taxpayer. You won't save any tax on dividends, because you are not paying any tax on dividends outside the ISA anyway - but the other advantages of using an ISA (never having to calculate and report gains, and growing the overall size of the tax-protected wrapper) are worth having. It means that at some point in the future you could use that nice big tax-protected wrapper to put something else in, later in life - like converting it into a cash ISA, or investing in bond funds which pay interest which would be taxable outside the ISA.
Obviously the downside to the pro-ISA choice is there may sometimes be fees for running an ISA account with a broker or platform, which might not be payable if you had a non-ISA account with the same broker or platform, or were holding the assets directly yourself.
Does that make sense now?0 -
bowlhead99 wrote: »It is not contrary.
Let's look at the first sentence.
No taxpayer, whether high or low or zero rate taxpayer, will ever pay a penny of tax on dividends received in an ISA. The tax is zilch, nada. Dividends are not taxable in ISAs, nor for that matter are they taxable in pensions. An ISA, like a pension, is a tax exempt savings vehicle with a forcefield around it. The tax man cannot see inside to see what income you have received, what gains you have made. He does not charge you any tax on interest, on dividend income, on gains. He does not require you to produce any records explaining whether your ISA pot grew in value due to dividends or gains. He will never take any tax from you.
OK? Are we clear that you do not have to pay tax on dividends you receive in an ISA? Good, let's go on.
The second paragraph you quoted explains that if you were a basic rate taxpayer, investing in dividend-producing funds or shares, there is no massive advantage in using an ISA to protect you from dividend tax.
You are wondering why is that, if there is no dividend tax payable in an ISA? Surely it is better to invest in an ISA to save the tax, because you have just read that inside the ISA, there is no dividend tax?
Well, that is explained by my paragraph earlier which you snipped out, which went like this:
So, nobody pays tax on dividends in an ISA. But if you are only a basic rate taxpayer, you will not pay any tax on dividends outside an ISA either. The taxman gives you a tax credit which fully clears your liability. Effectively he deems that the company paying you the dividends has already paid its corporation tax in getting to a smaller amount of profit after tax, so doesn't want to tax you so harshly when you receive the dividend, because he has already taken a slice.
So he gives you a tax credit which, for a basicrate taxpayer, fully covers the tax that would have been due. As a basic rate taxpayer outside an ISA, you receive say £90 of dividends via cheque. Cash it, spend it, do what you like with it, you will not need to give anything to the taxman.
As a basic rate taxpayer inside an ISA, you receive the £90 inside your investment account. Buy new investments, take some of it out as cash, do what you like with it, you will not need to give anything to the taxman.
The other paragraph that you snipped was that for a higher rate taxpayer, outside an ISA, the tax credit does not fully cover high rate tax so there would be something further to pay and the ISA is very useful. Outside the ISA you would have got a £90 cheque but have to go and pay some tax. Inside the ISA you get the £90 and you can use the whole £90 to buy new investments, take some or all or it out as cash, do what you like.
Does that cover it?
So if you're investing in funds outside an ISA, and you have the space available within your annual subscription limits for ISA, you might as well put them in the ISA, even if you are a basic rate taxpayer. You won't save any tax on dividends, because you are not paying any tax on dividends outside the ISA anyway - but the other advantages of using an ISA (never having to calculate and report gains, and growing the overall size of the tax-protected wrapper) are worth having. It means that at some point in the future you could use that nice big tax-protected wrapper to put something else in, later in life - like converting it into a cash ISA, or investing in bond funds which pay interest which would be taxable outside the ISA.
Obviously the downside to the pro-ISA choice is there may sometimes be fees for running an ISA account with a broker or platform, which might not be payable if you had a non-ISA account with the same broker or platform, or were holding the assets directly yourself.
Does that make sense now?
Well not really. I believe that I pay 10% tax on dividends from my shares which are not in S&S ISAs and similarly for shares held in S&S ISAs. Being in an ISA wrapper doesn't change the dividend tax situation. I phoned HL and they agreed with this. This is for a standard rate tax payer. I'll continue to "Bed & ISA" shares each year in order gradually to exempt them from CGT but I can't see that I can avoid being taxed @10% in the dividends.0 -
Well not really. I believe that I pay 10% tax on dividends from my shares which are not in S&S ISAs and similarly for shares held in S&S ISAs. Being in an ISA wrapper doesn't change the dividend tax situation. I phoned HL and they agreed with this. This is for a standard rate tax payer. I'll continue to "Bed & ISA" shares each year in order gradually to exempt them from CGT but I can't see that I can avoid being taxed @10% in the dividends.
You really don't. Although I confessed to being confused by your earlier statement I should break cover and say I'm a tax adviser (although with no particular professional experience of ISAs - not my area). I should have just trusted my instincts (and the plain statements on HMRC's website).
The 10% tax credit that comes with a standard dividend is entirely notional. When a company declares a dividend of £90 per share, £90 per share is paid by the company and £90 per share is received by the individual. None of it goes to HMRC. And if they're a UK basic rate taxpayer, the recipient will pay no additional tax because the 10% tax payable is off-set by the notional 10% tax credit that comes attached to the dividend.
So in no substantive way does a UK basic rate taxpayer pay tax on dividends. You certainly don't prejudice yourself by putting those shares in an ISA wrapper and actually you may put yourself at an advantage (tucking shares away for a possible future date when you might be a higher-rate taxpayer, or if you want to liquidate and trigger a gain which exceeds the annual exemption).0 -
You really don't. Although I confessed to being confused by your earlier statement I should break cover and say I'm a tax adviser (although with no particular professional experience of ISAs - not my area). I should have just trusted my instincts (and the plain statements on HMRC's website).
The 10% tax credit that comes with a standard dividend is entirely notional. When a company declares a dividend of £90 per share, £90 per share is paid by the company and £90 per share is received by the individual. None of it goes to HMRC. And if they're a UK basic rate taxpayer, the recipient will pay no additional tax because the 10% tax payable is off-set by the notional 10% tax credit that comes attached to the dividend.
So in no substantive way does a UK basic rate taxpayer pay tax on dividends. You certainly don't prejudice yourself by putting those shares in an ISA wrapper and actually you may put yourself at an advantage (tucking shares away for a possible future date when you might be a higher-rate taxpayer, or if you want to liquidate and trigger a gain which exceeds the annual exemption).
Well, looking back at an old Consolidated Tax Certificate [all non-ISA] for my wife and myself which HL issued I see a Gross figure, a Tax Credit figure and a Net Dividend/Interest figure. We actually received the latter [albeit it was dividend re-invested] which was 90% of the gross figure. Somehow the gross figure shrank by 10% to a net figure so I assume that that 10% went somewhere. Either that or else the words Gross and Net are being used in a novel way.0
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