Hey guys Iam new to all this so please be patient. I have had an account with freetrade for about 1 month now. I currently own 30 dividend paying stocks. My goals is to retire off the dividends in the next 15-20 years. Now would you guys recommend me moving all my money and stocks to a freetrade ISA account with the same strategy. I’ve heard it’s tax free? Iam aware I would only be allowed £20000 per year max to invest. But with the strategy I’ve explained is it a no brainer to use an isa instead? What’s the pros and cons? Thanks in advance. Remember Iam a noob so explain like your explaining to a 4 year old
An ISA is a no brainer - provided you don’t want to invest more than £20k a year in to this or a savings ISA. All those divis and profit on shares will be 100% tax free, even when you eventually draw it out.
If you leave it in a standard account then you will be liable for tax on any divis and any profits you make when you sell a stock. Although these might be well below the payment threshold now, as your portfolio grows it won’t take long before you are liable
+1 for no brainer. If you are able to, fill up to your max of £20k first and then the rest in a standard investment account.
Edit: please ignore this post. I made a confusion with SIPP’s as Sendu noted
In addition to what @srcudlipp said, please also have under consideration ISA’s tax wrap are currently capped at around £1M. Meaning you’re liable to pay taxes after you get there. It’s still a no brainer. I hope you get to the point you have to worry about it
Are you thinking of pensions (SIPPs)? There’s no limit on the amount that is tax free in an ISA.
When my portfolio gets to £1m I will happily pay tax on the excess
Maybe I misread. Let me check
It’s not quite a no-brainer in terms of timing. For it to be worth the £36 ISA account fee, you need to be earning enough dividends for your tax on those dividends to be more than £36.
The dividend allowance is £2000, on which you pay 0% tax. If you’re in the lowest income tax bracket, you’ll pay 7.5% tax on anything above that amount.
So when you’re earning over £2,480 in dividends a year, it’s definitely time to switch to the ISA.
You might consider switching earlier if you total holdings are approaching £20k in value, so you can easily stuff it all in to an ISA in one go and not worry about exceeding your limit in the future due to transferring everything in your GIA to the ISA.
I think the more important benefit here is that all assets within an ISA are exempt from capital gains tax, so if you’re investing any substantial amount (e.g. more than say £1k) it’s a no brainer!
Brilliant thanks guys so I think the ISA route is the way forward for me. I did open an investment isa with Moneybox about 3 months ago then closed the account. When can I open the freetrade new ISA?? Also can I not have the two accounts running at the same time? I went on freetrade ISA and it noted that I had to sell everything first before opening an isa.
Amount still affects if it’s a no-brainer.
CGT allowance is £11,700.
Dividend stocks aren’t really known for their growth. Let’s be incredibly generous and say your whole high-dividend paying portfolio managed to also grow 7% in 1 year.
Your current portfolio value would have to be in the region of £167,000 before you’d start paying capital gains tax. This is 2 orders of magnitude more than £1k!
You really don’t need to worry about an ISA for a long time unless you’re very rich. If you want to throw away £36/yr when you’re just starting out with small amounts of investment just for convenience, that’s up to you.
I’m afraid this seems to lean on a bit of a common misconception.
Your capital gain isn’t measured by how much your portfolio gained within a year, it measures the whole amount your investments grew from purchase to sale. That’s really important. If you buy an investment in 2010 and sell it in 2019 and it grew by £30,000 over that time, but only £5000 from 2018-2019, you still have a capital gain of £30k. You’ll be taxed on that minus the around £11k allowance.
Plus you can’t necessarily transfer your portfolio into an ISA when it’s convenient for you. Firstly, you can only put in a max £20k/year and secondly you have to put it in as cash.
Even using a special non-ISA to ISA transfer service, your broker still sells your investments and then re-buys them. So you still are liable for capital gains tax in that scenario.
If you waited until you’d built up to £100k portfolio before ISA wrapping, firstly you’d need several years to put it into the ISA. And every time you sold the investments to move the money into the ISA, you’d incur capital gains tax on the sale. And if that was a portfolio you’d started a long time ago, the capital gain could be very big.
Finally, the ISA is even more relevant for dividend investors as all your dividend income will be UK tax-free. If you get dividends outside an ISA, your threshold before you start paying income tax on them is only £2000.
To sum up, ISAs are definitely not just relevant to the very rich - they’re a relevant consideration to almost everyone investing for the long-term.
Thanks for clarifying; I did indeed oversimplify with a 1 year example.
If you were doing really well with index investing, you could be looking at 150% growth over 5 years. So an initial investment of just £8,000 could take you over the CGT limit.
The longer the timeline, or the better you do, the less you’d need to initially invest.
But you can just check every year to see where you are. If your growth looks like it’s going to take you over the limit, that’s the time to switch. As I mentioned, for convenience you could switch when your current value is approaching £20k, so you can do a single-year switch.
My point remains that there’s no point wasting money on the ISA until it’s worth doing the switch.
Thanks Toby. This is really valuable.
So in a nutshell until my dividend 15% TAXES reaches £36 per month there’s no rush to switch because I’d be wasting £36 per month on the ISA monthly fee.
Per year, not per month
15%? See https://www.gov.uk/tax-on-dividends for the tax percentage you’d pay on dividends over £2000/yr. It’s either 7.5%, 32.5% or 38.1%.
If you don’t want to worry about tax percentages and keep things simple, just switch when you start to approach £2000/yr in dividends.
I’m not sure our discussion is helpful in clarifying things for the OP. Let me try to summarise…
In a nutshell, people generally think that it’s a good idea to start using an ISA when you start investing for the long-term. However, if you’re really careful and diligent, you can theoretically save on the ISA fees by waiting until your capital approaches £20k.
You need to consider other sources of income here too e.g. selling a second property could take you over the capital gains threshold. There’s more details here: https://www.gov.uk/capital-gains-tax/rates.
HMRC gives some useful information more generally about the pros & cons of Stocks & Shares ISAs here: https://www.gov.uk/topic/personal-tax/savings-investment-tax.