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At this time of year, it can be hard to avoid mention of the looming ISA deadline. That happens annually at the end of the tax year, which falls this weekend (5 April). It is for people to put money into their Stocks and Shares ISA.
Once the deadline passes, this year’s contribution allowance will be gone forever.
However, as one door closes, another opens. At the stroke of midnight on 5/6 April, the current tax year’s ISA contribution allowance ends but another one immediately starts.
Given that, it can be easy to wonder what all the fuss is about. But not acting in the next several days could actually be a costly mistake. Here’s why!
The ISA wrapper offers tax benefits that can add up
Put simply, the money put into a Stocks and Shares ISA is protected from the taxman. In practice that means if someone makes a capital gain on the shares in their ISA when they sell it, it is not taxable. Dividends they earn inside the ISA are also not taxable.
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.
Even better for a long-term investor like myself, those untaxed dividends can stay inside the ISA wrapper. So for example they could fund more share purchases.
It has the effect that while a typical investor can only put £20k a year into their ISA, they may actually be able to grow its investable amount by more than that each year thanks to dividends being kept inside the tax-free wrapper.
The costs of inaction
Does any of this matter? Absolutely – for two key reasons.
First, legally shielding investments from taxes such as capital gains tax and income tax can be a significant saving.
Depending on how well those investments do, that could mean a substantial amount of money that can stay with the ISA holder rather than being forcibly commandeered by the taxman.
Secondly, this potentially offers something for even a modest taxpayer. With so much discussion centred on the standard £20k annual contribution allowance, many of us may think ‘I don’t have anywhere near that much spare to put in the stock market, so this doesn’t matter to me‘.
But remember – that £20k number is the ceiling. Even for someone with much less to invest – a coupel of hundred pounds, say – taking advantage of their ISA allowance could help them legally reduce the tax to which they would otherwise be liable.
I’m excited about this share!
That may seem academic. But what if a share soars and so might attract a hefty capital gains tax even on a modest investment?
One share that has soared is digital advertising agency S4 Capital (LSE: SFOR). It went up 455% in a year and a half, reaching over £8 a share. However – that was years ago! Now it sells for pennies.
Still, as a long-term S4 Capital investor, I think it may now be badly undervalued. This month, it announced a 10% dividend increase. Net debt has been sharply reduced. The company’s digital focus could help it navigate clients through the AI transformation.
Then again, it may not. Revenue is falling and there is a risk that AI could eat into the ad agency’s lunch, hurting revenues and profits.
That risk is real. But I plan to hang onto the S4 Capital shares in my ISA, as I think its improving balance sheet and strong digital capabilities deserve a much higher valuation.
This story originally appeared on Motley Fool
