On Wednesday, 6 April, the 2022-23 tax year begins. At this point, UK residents aged 18 and over can open a new tax-free Individual Savings Account (ISA). ISAs allow UK resident to save and/or invest their money without paying tax on their income and profits. Along with pensions, ISAs are one of the best legal tax shelters around.
Please note that tax treatment depends on the individual circumstances of each client and may be subject to change in future. The content in this article is provided for information purposes only. It is not intended to be, neither does it constitute, any form of tax advice. Readers are responsible for carrying out their own due diligence and for obtaining professional advice before making any investment decisions.
However, with UK interest rates still close to record lows, I don’t bother saving cash inside an ISA. For me, it’s just not worth it. For example, an interest rate of 1% a year equates to £10 a year on £1,000 on deposit. The tax on this for me is up to 4% — a tiny saving of £4. That’s why I prefer to put my money into Stocks and Shares ISAs. In the long run, I’m sure that this will save me a great deal more in tax.
Time is running out…
Just the other day, I had an unexpected windfall when a modest but welcome sum landed in my lap unexpectedly. I’ve decided to round this up to £1,000 and invest it for my family’s future. My timescale for growing this money is at least 10 years. Hence, it makes sense for me to invest it in company shares. And where better to protect my pot from the taxman than inside an ISA?
To make full use of my 2021-22 ISA allowance, I have to deposit this bonus into an account on or before 11.59 pm on Tuesday. In other words, I need to do it today or tomorrow or lose this year’s remaining ISA allowance. As I write, that leaves me with about 34 hours, so I need to hurry up!
How I’d invest £1,000 into an ISA today
My goal as a long-term ISA investor is to generate returns in two ways. First, from dividend income — the passive income paid by some companies to their shareholders. Second, from capital gains — the profits made from selling shares at prices higher than I paid for them. However, not all company shares pay dividends. Also, they are not guaranteed, so can be cut or cancelled at any time. For these reasons, I prefer to buy shares in large, established dividend-paying businesses, particularly those in the FTSE 100 index.
But how to divide up £1,000 into different shares inside an ISA? To spread my risk, I’d aim to put my money into, say, four different companies. That’s £250 per share. Also, to diversify my portfolio, I’d try to invest across different business sectors, rather than concentrate on one industry or field.
Finally, the good news is that there is no shortage of dividend shares in the FTSE 100. By my reckoning, around 90 stocks in this index pay dividends to shareholders. These companies include huge and solid household names such as Shell, AstraZeneca, HSBC, and Unilever. Indeed, I imagine that at least one of these top shares will be nestling safely inside my ISA before tomorrow is out!
