Utilising Investment ISAs

March is time to use your ISAs!

As many readers are well aware, in the UK the ISA season is upon us. Savers are rushing to use up their tax free savings allowance before the new financial year begins on April 6th. I recommend reading some of my previous articles for more information on ISAs.

Savers don't use their tax free allowance 

The amount you can save in this tax efficient wrapper is £11,280 for 2012/2013, only half of which can be in cash. Many online trading platforms offer ISA trading accounts. Any money that you put into this account is sheltered from all taxes: income tax and capital gains.

The best way to use an ISA

Once money goes into an online ISA stocks and shares trading account it is sheltered from tax unless you decide to take your money out and use it elsewhere without ISA status. This means that you can buy and sell shares as many times as you like whilst it remains within the ISA trading account.

The UK capital gains allowance is £10600. My view is that if you're buying shares (eg growth shares) with a view to making a capital gain there is no point in wasting any of your £11280 stocks and shares ISA allowance on these sorts of investments. It is unlikely that unless you are investing large amounts of capital or manage to invest in a multi-bagger (a share that double or triples in value) that you will surpass the capital gains allowance when you come to selling. Instead, you should use your ISA allowance to invest in high yielding dividend stocks or in shares you intend to hold for long periods of time (decades). This way, your dividend income is tax free.

Some investors would argue that why should you be picky about what goes into a stocks and shares ISA, just throw everything in unless you're wealthy enough to be able to invest sums greater than the ISA limit each year (in that case you would obviously want to be selective about what you prioritise for ISA status). However, I would disagree. The shares you are looking to put in an ISA trading account are going to be long term stocks with decent dividends. Ideally you want to be buying into these sorts of investments at the right price. This will require patience and a stockpile of cash ready to invest in your ISA. This will also require watching many high yielding stocks for a while. Do not feel the pressure to put everything in at once. Put shares into your ISA when they reach the right price.

How I use my ISA

I had been watching shares in Morrisons for quite a while. When they fell from about 340 pence to 260 pence, and considering their plans for the future and a current PE (price to earnings ratio) of about 8, I felt that it was time to inject £1000 into my stocks and shares ISA to make this investment. In the meantime I will enjoy a 3.8% tax free dividend income whilst the capital gains grow.

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