Besides the normal investing/trading accounts various share-dealing brokers offer, many brokers also offer the opportunity to open tax-efficient accounts, with all the functionality of the usual trading accounts. These include a variety of Individual Savings Accounts (ISAs) and Self-Invested Personal Pension accounts (SIPPs).
General Investing Accounts Introduction
The normal investing accounts share-dealing brokers offer are usually inexpensive and designed to allow traders or investors to manage a broad spectrum of investments. These accounts are available in a variety of forms at various costs, but are intended primarily for individuals who are confident about making their own investment decisions. In the current era, trades and investments are made online via a trading platform, although most brokers still accept trades via telephone and email. One reason these accounts are very popular is that many of them offer all the benefits of a share-dealing account with the added benefit of tax efficiency via an Individual Savings Account (ISA) or SIPP.
An Individual Savings Account is a means of tax-free saving and investing. Currently, for the 2017/18 tax year, an individual can save up to a maximum of £20,000, which can be held in a stocks and shares ISA, a cash ISA, a Junior ISA, an innovative finance ISA, a Lifetime ISA, or in a “Mix and Match” combination of these.
Every year individuals get a new allowance for the following tax year (in 2017/18 this is £20,000), but if an allowance is not used for any tax year, it does not roll over into the next tax year.
Some ISA options have limits; for instance, the tax allowance on a Lifetime ISA is £4,000 a year, which means you could put £16,000 into other ISA options. For the Help to Buy ISA program, the saver can deposit £1,200 in the first month and £200 in the following months. Again, the balance can be put into other ISA account types.
Stocks and Shares ISAs
Stocks and Shares ISAs are a tax-efficient means of investing. It is possible to invest in funds, ETFs, unit trusts, investment trusts, bonds, and individual company shares. Usually, an online broker or fund management company administers these ISAs and may charge fees to open and hold a stocks and shares ISA, change investments, withdraw money, or move to a different provider.
Cash ISAs are just basic tax-free savings accounts. An assortment of cash ISAs are on offer, including regular savers, fixed-rate deals, and instant access.
A Junior ISA is similar to the above ISAs, but carries a limit of £4,128 (for 2017/2018). The annual allowance can be split between cash or stocks/shares or a combination of the two. A Junior ISA is opened in a child's name, but is managed by an adult, although the child can take control of the account at age 16. The child can only withdraw funds at age 18, but 16-18 year olds can open an adult cash ISA for £20,000 together with a Junior ISA the same year, thereby saving up to £24,128 a year tax free.
Innovative Finance ISAs
Innovative Finance ISAs are somewhat more complicated and can incorporate various types of peer lending. Examples include crowdfunding and property and business lending. A cash ISA carries the obvious risk that the borrower may default on repayment. On the other hand, an Innovative Finance ISA is popular because it is tax free.
Lifetime ISAs were launched on April 6, 2017 with a limit of £4,000 per year, either via regular savings or a lump sum. The government then adds a bonus of 25% onto whatever is saved. This bonus is paid until age 50, with a maximum bonus of £32,000 (this is assuming an ISA account is opened each year between the ages of 18 and 50 and a maximum of £4,000 is contributed).
To open a Lifetime ISA, you must be over 18 and under 40 years old.
Help to Buy ISAs
The Help to Buy ISA program was launched in late 2015 and is aimed at first-time buyers. It is possible to save £1,200 in the first month and then up to £200 per month subsequently. If you then go on to use these funds to purchase a first home, the government will add a 25% bonus top up. The maximum bonus is £3,000.
A Self-Invested Personal Pension (SIPP) is a tax-efficient means of saving funds for retirement in the UK. SIPPs are government approved and empower individuals to make their own investment decisions. Unlike more traditional pension models, however, where the choice of investment is often restricted to a limited number of funds (mostly run by fund managers of finance companies), a SIPP offers more scope for broader investment because it offers personal choice.
Assets that can be held in a SIPP include deposits/interest on deposits, shares listed on any recognised stock exchange (UK and overseas), unlisted shares, authorised UK Unit Trusts, Contracts for Difference (CFDs), Investment Trusts, Commercial Property, Futures and Options traded on recognised futures exchanges, and various other assets.
As with all pensions in the UK, no income tax or capital gains tax is levied on a SIPP, and again, as with other pensions, a SIPP allows for up to 40% tax relief on contributions made.
If you are a basic rate taxpayer paying at the 20% tax threshold, then investing £1,000 would require a contribution of £800; on the other hand, for a taxpayer paying 40%, the contribution would be only £600.
One hundred percent of annual earnings up to a limit of £40,000 (for 2016/17) can be paid into a SIPP. For every £2 of income over £150,000, the annual allowance falls by £1 (until the tax-free limit reaches £10,000).
It is possible to open a SIPP account with new contributions or to transfer to a SIPP from a current pension scheme. Contributions can be made either monthly or as a lump sum.
A Junior SIPP is similar to the above, but the investment is made on behalf of a child. It is possible to save/invest up to £3,600 gross for each child in each tax year, for which the government will pay 20% in tax relief (up to a maximum of £720). This means the contract contribution would be only £2,880 in this case. Investments in a Junior SIPP cannot be accessed until the child is 55 years old.