Thanks to the currently high rate of inflation, the 2012 ISA allowance has been increased quite a bit above last year’s level.
The 2012 ISA allowance is £11,280.
This means that between 6 April 2012 and 5 April 2013, you’ll be able to put up to £11,280 into your ISAs – and so out of the reach of the taxman!
Note: The ISA allowance is the amount of new money you can put into an ISA over the year. If you already have ISAs with funds in them from previous years, that money doesn’t count towards the new annual ISA limit. Only new money does. This way you’re allowed to build up an ever-bigger ISA pot over time.
As always, up to 50% of your total ISA allowance can be put into a cash ISA. This means the 2012 cash ISA allowance is £5,640.
The total you can put into a stocks and shares ISA is £11,280 minus whatever you will put into a cash ISA that year.
For instance, if you choose to put £2,000 into a cash ISA over the 12 months to 5 April 2013, then you could put £9,280 into a stocks and shares ISA that same tax year.
On the other hand, if you don’t put any money into a cash ISA, then you have the full 2012 ISA allowance free for shielding more of your equities and bonds from tax by moving them into an ISA1.
How to use your ISA allowance
Only higher-rate taxpayers pay tax on share dividends, whereas income from cash, corporate bonds and gilts is taxed for lower rate and higher rate taxpayers alike.
This means most lower-rate tax payers owning bonds should put them in an ISA first, and then put dividend paying equities in after that if they have any spare ISA allowance leftover.
Higher rate taxpayers should put whatever they can into an ISA. You might put your highest yielding shares or bonds into an ISA first, to protect the income they pay from tax. (The effective tax rate on share dividends is lower than on bond income, though, so do your maths).
Even if you’re a lower rate taxpayer and you own no bonds, I’d still put your shares (whether directly owned shares or shares held in an index fund or similar) inside an ISA wherever you can.
This is to avoid you building up a capital gains tax time bomb, which can really take the shine off selling your shares for a profit in a few years time!
What’s more, you might become a higher rate taxpayer in the future.
2012 ISA allowance and CPI inflation
The ISA allowance only began going up with inflation in March 2010, when the government raised the annual allowance by £3,000 to £10,200 for the 2010-2011 tax year.
At the same time, the then-chancellor Alistair Darling also announced the annual ISA allowance would go up every year by the RPI inflation rate in September of the prior year, rounded to the nearest £120.
However no government seems to like allowing us to pay less tax, especially in times of austerity. Accordingly, the current chancellor George Osborne is only raising the 2012 ISA limit by the CPI inflation rate, which is typically lower than the RPI inflation measure.
CPI inflation was 5.2% as of the official September figures. RPI inflation was running at 5.6%!
At least the rounding procedure has worked in our favour.
The 5.2% inflation rate should have meant the new limit was £11,235. But rounding to the nearest £120 takes us higher to £11,280.
Monthly savings into an ISA
Rounding to the nearest £120 is designed to make it easier for us to set up monthly savings.
Dividing the 2012 ISA allowance by 12 months gives us a saving target of £940 a month, which is quite a substantial amount for most people to save from their earnings.
One way to use it up is to sell any non-ISA-d investments that you’ve got that can be moved into an ISA. (I’ve been doing this for years, having foolishly not bothered with ISAs (or their predecessors, PEPs) in my early years of saving).
If you’re thinking of funding your 2012 ISA allowance with share sales, then read my article about defusing capital gains tax on shares for some pointers on how best to sell.
- Note that when I speak of moving shares and bonds into an ISA here (and in the rest of the article) I mean selling them, putting the money raised into an ISA, and then repurchasing. Unfortunately you cannot transfer shareholdings into an ISA directly to avoid these transaction costs. [↩]
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Good stuff. I’m stuffing cash into ISAs and SIPPs as fast as I can. But to me this allowance does seem a bit too generous (and I’m not sure why this hasn’t hit the political radar yet). How many ‘ordinary’ people can spare £940 a month? So make the most of it while it lasts.
Agreed. I think it’s possibly worth young and more risk tolerant people running a larger mortgage or similar to fund an ISA if it’s their only way of filling their allowance.
I’d say that 40% tax relief is an even juicier target for cash greedy politicians though — although perhaps one that’s even harder to confront.
Hello, I don’t really understand these stock ISAs. I’ve just read your other post on them and I still don’t get it. Could you do a post on why we need them rather than trading outside of an ISA (I do that, and I’m a “normal” taxpayer rather than a higher income tax payer).
@Millie
A S&S ISA is exempt from capital gains tax. This could be worth a lot when you sell.
Hi Millie. Well, if you do any sort of active share trading in volume, then they’re worth it just to avoid reporting requirements should you go over a certain volume, as I’ve written before: http://monevator.com/2009/08/04/get-an-isa-life/
That’s only going to happen if you’re dealing with pretty big sums most likely, though, and as I say if you’re active. Similarly Capital Gains Tax in the short term.
It’s really all about the long-term. Given how cheap ISA protection is, your future self two decades down the line could well thank you for taking that ISA protection out if we see a return to solid returns from equities again for a while. You have to pay tax on equity income or gains to really appreciate how galling it is to give away a big chunk of the returns you made for taking on very real risks, while others sat in cash or simply bought a bigger house to live in and enjoyed a property boom. It’s infuriating for small investors, though I see the case for saying high net worth individuals shouldn’t be able to sit outside the cash net by taking away capital gains tax altogether.
Anyway, I digress. I’ll put your post idea onto my To Do list and try to spell out the case simply. 🙂
>Only higher-rate taxpayers pay tax on share dividends
Really? I thought it was 10% if you earn under the £35,000 threshold.
@Salis — This 10% is the bane of my life. 😉 There’s a 10% credit that is set against the 10% you pay, so the effective rate is zero for non-higher-rate taxpayers. The confusion arises I think because years ago (and it is now close to a decade ago!) you could reclaim this 10% in an ISA. You can’t now.
Please see this article for more info: http://monevator.com/2009/11/10/how-uk-dividends-are-taxed/
Thank you for your reply 🙂
I have been doing some homework since I posted earlier, and have discovered that the company I use to manage my shares (it’s like a web portal thing) and another company I got some finance quotes from once both offer equity ISAs. So, now I know where to get one, I just don’t know what to do with it! It’s funny because I’d noticed that once before and wondered why you wouldn’t want your ISA with a proper bank, but that’s because it’s not a cash ISA! I’m such a newbie with share and stock dealing!
> gives us a saving target of £940 a month,
Blimey, that is a decent enough ask. It’s even worse when you think that all hell is probably going to cut loose in the Eurozone over then next few months, which means having the wedge at the start of the period is probably more useful than saved evenly over the year. Of course that would be considered market timing and you can’t do that etc etc.
> it’s possibly worth young and more risk tolerant people running a larger mortgage or similar to fund an ISA
Hmm, what could possibly go wrong? Baby boomers selling their houses over the next 20 years perhaps, making property less valuable in real terms? Credit crunch two forcing reality on the highly leveraged property market? Lost decades Japanese style? Higher interest rates…
You personally are capable of evaluating the risks and coming to a conclusion that squares with a considered opinion of the risk/reward. For nearly everybody else, buying shares on the back of a leveraged investment may be playing with fire and should come with a potential wealth warning that leaves them on their backs and seeing stars… That’s not to say it may not be a good idea, the return of the ISA mortgage of yesteryear for those with cojones of hardened steel 😉
@ermine — Hi! 🙂 I genuinely like the way you are always very quick to point out the risks of my combining mortgages and investing in the same paragraph! You’re like the last old man in town who remembers what it means when the wolves howl in early December… 😉
The fact is though plenty of people (most middle income earners over 40 I’d imagine) invest at the same time as running a mortgage, if only because they’re investing in a pension. So they’re already effectively funding their investment via the mortgage (…since they could instead be paying off the mortgage with their savings).
I think (hope!) Monevator is a site about helping people (and myself for that matter) understand their finances and how all these moving parts interrelate.
If you’re say 35, earning a very good London type salary, and taking out a mortgage for £200K, I feel comfortable saying that making it £220K, for instance, to fund a couple of years ISA allowances so you don’t lose them forever is not a huge stretch of your risk profile.
Such a person can choose to (and probably should) invest the ISA money more conservatively, perhaps corporate bonds or the most defensive equities.
Hmm, what could possibly go wrong? Baby boomers selling their houses over the next 20 years perhaps, making property less valuable in real terms?
If house prices tank, you’re on the hook anyway as the asset you’ve bought has fallen in value. The mortgage is independent from the value of your house, in that it’s a debt to be repaid that just happens to be secured on your house. And investing in equities with the extra debt has diversified away from house prices.
I agree with your other ‘things that could go wrong’ as being very much the sort of thing anyone doing this should consider. Here’s my previous post on the subject for anyone reading who wants some more food for thought:
http://monevator.com/2011/04/14/pay-off-mortgage-or-invest/
I should also be clear that I am only suggesting this strategy is a reasonable bet for somebody who can meet the resultant higher mortgage payments on a monthly basis.
I am NOT suggesting that taking out an interest only mortgage and hoping your investment has paid off on-time in 25 years is an equally conceivably sensible strategy. It’s not — it’s much more risky.
@Millie — A stocks and shares ISA is what they call a ‘wrapper’ that you can put investments in. Shares, funds, bonds, ETFs, that sort of thing. An online broker usually offers two kind of trading accounts — normal dealing accounts, and ISA accounts. In this instance you basically fund your ISA dealing account with up to your allowance for the year, and then buy shares or funds within that ISA account.
You also have providers like Legal and General who offer a range of their own funds and will enable you to hold them in an ISA.
You can open one new cash and one stocks and shares ISA a year, which can take money up to your annual allowance. But it doesn’t have to be the same ISA provider you’ve used in previous years, so over time you can have a few ISA accounts with different providers dotted about the place.
Whenever I try to write about ISAs I see how complicated it must seem if you’re a newcomer to investing. It’s actually pretty simple once you’ve got a bit of experience, but I appreciate you might not believe me yet! 😉
Keep reading and learning, I say. 🙂 This HMRC link might help.
> who remembers what it means when the wolves howl in early December…
I like it. Hark, those wolves are howlin’ now, and from pretty much all points. I remember what it’s like to sell a house for half of what I paid for it. It happens to people, they just stay schtum about it, which is why everybody believes house prices always go up because you hear the windbags in the pub crowing about their gains…
Having said all that, I actually rather like the idea of an ISA mortgage, provided the punter drives it themselves and understands the issues. For you hypothetical 200k mortgage (can you get anything other than a broom cupboard in London for that?) the mortgagee could take out an interest only mortgage @5%-ish = 10k p.a. and start saving @ 3-4% for a 20 year term which fits an ISA allowance well. Of course that means they’re paying £16k p.a. for housing, so not for anybody on the national average wage. If they lifestyle it like The Accumulator suggested on Vanguard funds targeted to a 20-year time-frame that would make a nice strategy, where the owner could see their investment tracking the capital.
Sad thing is I had no ability to understand that sort of thing at 28 when I first bought a house. And the temptation to chase momentum in the dot-com boom would have been too much, You can’t put an old man’s investment strategy into a young man’s hands and expect them to stay the course.
@ermine — As I say above, I think that strategy is much riskier than what I’d suggest, which is a repayment mortgage.
The danger of using an interest only mortgage, is not only are you asking for your investments to beat your total debt payment on the extra money you borrowed to invest — you are also asking them to do so within 25 years. There’s also a timing element too, in that if somebody’s investments outperform sooner, will they have the fortitude to cash them in to pay off the capital they borrowed? All extra risks.
With a repayment mortgage, you’re paying the debt off anyway, so you’re not relying on your investments to deliver within a time frame. When investing in equities, that is a massively less risky proposition! 🙂
I think interest-only mortgages — used as you recall from the old days! 🙂 — have their place for sure, but again only really for sophisticated and pretty wealthy investors who can save massively more than optimistic sums might suggest they need to, just in case their investments don’t perform.
@ermine
“For you hypothetical 200k mortgage (can you get anything other than a broom cupboard in London for that?) the mortgagee could take out an interest only mortgage @5%-ish = 10k p.a. and start saving @ 3-4% for a 20 year term which fits an ISA allowance well. Of course that means they’re paying £16k p.a. for housing, so not for anybody on the national average wage. ”
I’ve read this a few of times and cannot follow your train of thought – do you already own the house? are you just releasing 200k of equity? what are you thinking you’d be left with at the end? Is it just an argument for leverage, e.g. investing someone elses money and skimming the difference between the returns you generate and the cost of the loan?
Quite curious to understand what your strategy is?
Regardless of the actual tax benefits, a big positive is that life’s just so much simpler if you complete your own Self Assessment Tax Return because you don’t need to declare the dividends/interest received and any capital gains.
There is one single exception to the rule about transferring shares directly into an ISA. If they are approved company share options (including SAYE) up to an ISA-worth at the value at the time of transfer can move straight in without a disposal, but only within 90 days of exercise. The certificate needs to be in the name of the person holding the ISA and they need to be that person’s options. This means you can transfer some to a spouse for them to do an ISA transfer. I tried to get HL to do this and they sent me a long letter that said “NO!”
You can still do a CGT allowance of them, and so can spouse, so it’s still a good wheeze.
@ben
When you borrow money for a house, the repayments go towards the interest that you pay for using other people’s money, and part towards paying down the money you borrowed. In mortgage parlance the former is the interest, and the latter is the principal. You only truly own your house when the principal is paid off, and by a cruel twist of fate the maths work out that for most of the time you are paying more interest than capital. That is why the halfway point or a mortgage, usually when you are in your 40s, is the most miserable point in a mortgage. You are too far from the distant carefreeness of youth, you are just as far from the sulit uplands of retirement, and you’re halfway through your mortgage terms and you’ve paid off nowhere near half your house.
In the heady days of the late 1980s through to the dot-com bust you could get a better return on stock market investments than nowadays, so people often split the two functions of paying principal and interest. You would borrow money from a building society, and pay them only the interest. These were the interest-only mortgages that caused some of the credit crunch. You were meant to pay another financial institutions a smaller sum, and they would invest it for you and pay you a proportion of the profits, this was called a with-profits endowment policy. I was stupid enough to be talked into taking out one of these, despite my parents telling me why I wanted a repayment mortgage and various others educating me, it was the promise of extra profits that dazzled me, and perhaps the saleswoman’s lovely green eyes…
Fortunately I had no dependants at the time so I managed to weasel out of my stupidity by pusuing a mis-selling claim as the life insurance had been worthless to me. The finance industry sold lots of people with profits endowments, which turned out not to make any profits because the advisers and financial institutions stole so much of the punters’ funds in fees.
Nevertheless, the idea of saving up to pay off the principal using a different investment than a cash fund or repaying more than the interest only has merits, provided you understand and accept the risks. So in my example the punter pays 5%interest, and becuse his mortgage is for 20 years, each year he also puts slightly under 1/20th of the principal into a shares ISA for example; slightly less because he expects the ISA to return more than he puts in. Thereby saving money compared to putting in 5% (=1/20th) each year into paying the principal, in addition to his 5% interest. Because he pays the interest in full each year the total amount he owes doesn’t get bigger.
The catch is that you have to be capable of evaluating the risk/reward profile of your investment, lifestyle it to become more secure as the 20 years are up, and have the intestinal fortitude to suffer on average two stock market crashes knowing in the long run your strategy will probably win out.
That’s a lot to ask of someone, particularly when taking out their first mortgage. Monevator can do this, and has indeed described his thinking here. He is unusual. Heck, if I were starting out now I’m not sure I’d do it. I believe Monevator is right, but I am not sure I have his steadiness of hand under pressure, and my world-view differs from his in what I expect Western industrial economies to experience in future.
I paid down my mortgage in the end, after keeping it at £1k for a couple of years while I mulled over whether I had the hardened cojones of an investor, and came to the conclusion I was a wuss. I agree with Monevator that paying it down is irrational in my case, as after 30 years of working I had 100% equity and the price of the house was more than the mortgage. I did that because I remember what it meant “when the wolves howled in early December…” and I lost half the value of a house between 1988 and 1999.
So that’s the long story – Monevator says in the above-referenced article if you go the invest route
Thanks for the explanation. All clear. Did you have a prediction as to how much better off you might be after 20 years is up?
@ Investor
“I’d say that 40% tax relief is an even juicier target for cash greedy politicians though — although perhaps one that’s even harder to confront.”
HL seem to think the government is going to have something to say on precisely this in their autumn statement at the end of November…
They have already limited tax relief with the new £50kpa cap, and the zany carry forward rules. No more, please!
@Ben, Monevator wouldn’t approve, quite rightly, of me making a prediction 🙂 However, you can make your own, using the information he provided. You do, of course, have to share the premise in his article – I personally was so sceptical of the shares nominal rate of return I halved it!
The 10% is in nominal terms, about 4-5% in real terms after you allow for inflation, BTW. I figured I’d be more pessimistic and assume 5% interest and 5% ISA growth and no inflation. Inflation is good for you as a mortgage holder, so I can ignore it as worst case. I’ve modelled this for a 200k house. Your ISA is enough to buy your house in 19 years if you contribute to your ISA at 3.5% of the principal each year (ie total mortgage + ISA payouts of £1400 p.c.m.) and it grows by 5% of the accumulated stake. At that stage you have paid into your ISA + mortgage £403k for a £200k house, which is a damn good deal.
FWIW if I take Monevator’s 10% return rate I can achieve the same result paying 2.5% into the ISA (total £1250 p.c.m.)
I paid about three times the principal in nominal terms over my 20 year mortgage – and it was dropped to £1k for the last couple of years. That would be £600k in the example. Most people will pay a higher multiple because the normal term in the UK is 25 years.
The warning that should be delivered with extreme stress is that over 20 years you may be exposed to the risk of redundancy, and that risk peaks at times the stock market takes a bath. This means you must have no other debts, you must have an emergency fund that allows you to ride out six months to a year of unemployment and pay the interest on your mortgage, and you must not lose nour nerve at times of market turmoil. Otherwise you run the risk of losing a hellacious amount of money by being a forced seller into a market downturn.
@ermine
thanks again for the extra info
mortgages are terrifying beasts when you lay them out like that!
3 times the principal over 20 years is just horrendous – and yet we all of us pretty much do it
Its such a crazy situation – I used to think that hard drugs ruined lives, then, more recently, I thought that the media ruined lives, now I’ve read your post I realise its houses that are ruining lives more than anything. Imagine what you could do with that extra 400k if you’d have had the money up front?
its a mad world
> 3 times the principal over 20 years is just horrendous – and yet we all of us pretty much do it
It’s not as bad as that sounds. For a start, the value of the house will typically rise aong with inflation, so your 200,000 initial cost will probably be worth £400,000 after 20 years. And you do have to live somewhere, so you will be paying rent.
The worst thing about mortgages is market timing. You tend to need a mortgage sometime in your late twenties/early thirties and are at the mercy of whatever the market is then. I bought in 1988 at a market peak, and the market didn’t return to those heights for over ten years. I was lucky enough (or unenterprising enough) to stay in the same job for 24 years, so I didn’t have to move for work, so I could live with the negative equity and sweat/save it out.
The modern world of work is much less stable, so it is likely that house ownership will be less attractive in future and we may transit to the Continental method where people rent for longer, but with greater security of tenure. I am amazed ar Britain’s tolerance of amateur BTL landlords – I’d like to see larger professional residential rentals along the line of commercial property landlords, and improved tenancy agreements with common regulated standards as in Germany for instance.