What are the Tax Benefits of an ISA?
It’s been well documented that IF ISAs are tax efficient ways of investing. This being the case, they are often used as a means to save for the future and supplement people’s pension pots. So just why are they so popular? Part of the reason is, that unlike other methods of investing, they are not subject to the same tax rules and as a result can end up saving investors’ a lot of time, stress and money!
So what other tax benefits can the IF ISA offer?
In most scenarios, the money that you earn (even through investments) is subject to a high rate of tax. ISAs though, offer the rare opportunity for individuals to benefit from tax-free returns. As you can probably imagine, the introduction of the IF ISA back in 2016 was welcomed with open arms by many, saving investors countless hours of head scratching, frustration and general exasperation! As an IF ISA can offer higher rates (though with typically higher levels of risk) than other types of investment, the fact that you can now invest up to £20,000 completely tax-free has resonated well with the industry as a whole. The potential to earn more without the penalization of tax is just one reason why the IF ISA continues to grow in popularity.
Before 2016, it was necessary for all P2P investors to declare their P2P income to HMRC- usually by way of a self-assessed tax-form. The IF ISA however, takes tax completely out of the equation. You don’t have to pay tax on any income/capital gains that your IF ISA accumulates. You also don’t have to declare your ISAs in any capacity upon your annual tax return. With tax completely out of the picture, you are granted the luxury of not having to fill in all the necessary tax forms and paperwork, which can be time consuming at best! If you’re new to self-assessed tax returns for example, you would first need to register. This can take anywhere up to 20 working days. Consider that bullet firmly dodged!
If it is all proving a little stressful though you can get the help you need by checking out the HMRC website or by calling the helpline on 0300 200 3310.
Less Money to Pay Out
Although obvious, the less money that you have to pay out to the tax man, the more money you get to keep for yourself. Whilst it’s completely subjective and dependent on your specific circumstances, the less money you have to give to the tax man the better! It is important to note however that circumstances are subject to change and tax rules could alter at any given point.
To give you a brief impression of how much money you could be saving, just take a look at the following.
Rates of tax
Basic rate tax payer
Higher rate tax payer
Additional rate tax payer
|Capital gains on most investments (that exceed the allotted £11,700 annual allowance)||10%||20%||20%||0%|
|Dividend income over £2,000* (Income from shares for example)||7.5%||32.5%||38.1%||0%|
|Interest income ( from cash/ corporate bonds or any other type of fixed interest investments)*||20% (over £1,000)||40% (over £500)||45%||0%|
The tax-free benefits of an ISA extend across the entirety of the ISA family. This means that you aren’t simply restricted to one type of ISA. Instead you can have one of any type and enjoy the benefits of each – all whilst reaping the rewards of your tax-free benefits at the same time! It’s important to note however that you are only allowed to pay into any ISA of the same type just once in any given tax year.
*As with all investments, your capital is at risk and returns are not guaranteed. Please read our full Risk Warning and Important Information page before investing.