Tony Harris writes:

After months of bad economic and taxation news it’s good to be able to focus on something that should boost the lot of any contractor looking to minimise tax.

New rules for Individual Savings Accounts (ISAs) come into effect from April 6 2008 and there are positive developments to enhance what has become widely regarded as a flexible, tax efficient way to save for the future.

When Labour replaced the old Personal Equity Plan as savings vehicle nearly a decade ago it had planned to review their availability and suggested that their new ISA schemes might only last for a limited period of time. Thankfully ISAs seem to have become a permanent feature on the savings landscape and many millions of savers have taken advantage of the tax wrapper to shield money that would otherwise have benefited the taxman.

As ever, Treasury and Government officials come and go and each looks to leave their mark so there are a raft of amendments that will impact on the ISA regime in 2008/9. So what are these changes and how do they affect us?

Simpler
The changes are designed to make ISAs simpler and more flexible. Confusing Mini and Maxi ISA labels will be removed and will be replaced by “Cash ISAs” and “Stocks and Shares ISAs”. This is a welcome development because many savers were caught out by the complexity of having these two distinct wrappers - some fell into the trap of funding both and incurred the wrath of HMRC in the process.

Investors will be able to invest in both Cash and the Stock Market with different providers and will have the freedom to transfer assets between the two with ease. The overall limit that can be invested in ISAs will increase by £200, from £7,000 to £7,200. The maximum that can be invested in a cash ISA will be £3600 and the remainder in a stocks and shares ISA.

For example, if we invest £3600 in cash we can put £3600 into stocks and shares, on the other hand if we put £2000 in a cash ISA we can then put £5200 into stocks & shares or we may decide to put the whole £7200 into stocks and shares.

For anyone with an old Personal Equity Plan (PEP) investment, these are to be renamed as ISAs in order to make the management of portfolios easier. This will not affect your ISA subscription limits for the current or next tax year and PEPs that become ISAs will benefit from the wider ‘Qualifying Investment Regime’ available under ISA rules as Investors can choose a wider range of underlying investment types.

With interest rates set to fall further, anyone who currently holds a cash ISAs will be able to transfer them into stocks and shares ISAs without affecting their current tax year allowance but on a cautionary note, once you have transferred from a cash to a stocks and shares ISA, you won’t be able to revert the money back to a cash ISA. It is also important not to encash your ISA and then try to switch as you’ll lose your allowance.

ISAs have always been a tax-efficient way to save money and with the introduction of these changes, although there is only a nominal £200 increase in the limit, we now have more control over where our money is invested.

ContractorFinancials provides ISAs to contractors through Hardhatter. For more information and to use the online enquiry form, see ISA 'Finder'.

Tony Harris
ContractorFinancials

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Susie Hughes
The Editor © Hardhatter 2008