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Are ISAs Tax Free? Rules and Benefits

ISAs offer great tax-free benefits and when it comes to saving money, one of the best vehicles on the market today here in the UK is the Individual Savings Account or ISA. Here in this article, we will be looking into the Stocks and Shares ISA tax benefits.

To find out why ISAs, in general, are so popular and so often recommended, you need to understand how they work, the tax rules, and the implications that come with them. So, let’s start with what they are, then we can move on to taxes from there.

Are ISAs Tax Free? Rules and Benefits – Summary Table

🏦 Are there any tax benefits with a S&S ISA?Yes, and they are quite significant
💸 Do I pay tax on ISA withdrawals?No, you don’t
📣 Do you have to declare an ISA on your tax returns?No, you don’t need to declare any interests or gains from your savings or investments when filing your tax return
❓ Do you pay tax on Stocks and Shares ISA accounts?As long as you stick within your personal annual ISA allowance of £20,000, your contributions will be completely tax-free

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What is an ISA?

An ISA, or Individual Savings Account, is a savings vehicle that is constructed in such a way that you ideally don’t pay tax on your returns. There is, however, one restriction. The amount of cash you are allowed to save or invest in an ISA in any one tax year – your individual annual ISA allowance – is set at £20,000 per annum. This figure has remained unchanged since 2017.

You might like to think of an ISA as a protective box – financial professionals refer to them as “wrappers”. Anything inside these “wrappers” is protected from HMRC. There are two base types of ISA – the Cash ISA and the Stocks and Shares ISA.

How does an ISA Work?

If you are aged 16 or over and a resident here in the UK, you are entitled to save money into one form of ISA every year. The amount of money the taxman will allow you to save is known as your ISA allowance, and it is set at £20,000 per tax year.

Once inside an ISA “wrapper,” your cash cannot be taxed. It doesn’t matter how long it stays in there. Both the Cash and Stocks and Shares ISA tax positions are the same. The taxman cannot touch them.

The various types of ISAs

As we mentioned above, there are two main types of ISA, the Cash ISA and the Stocks and Shares ISA. There are some other variations, however, and the complete list of ISAs looks like this:

  • Cash ISA
  • Stocks and Shares ISA
  • Innovative Finance ISA
  • Junior ISA
  • Lifetime ISA

For those who aren’t particularly risk-averse, the Stocks and Shares ISA tax benefits, along with the potential for solid returns on your investment, make this type of ISA a shrewd investment tool.

What is the tax-free ISA allowance?

Are ISAs tax-free rules applicable to ISA allowance? Well, the UK government sets a tax-free ISA limit on how much you can save each tax year. The tax-free ISA annual allowance limit for 2021/22 is £20,000. You can put the full amount into either a cash ISA, investment ISA or innovative finance ISA.

You can’t put your tax-free allowance into more than one of each type of ISA account in the same tax year, for example, two stocks and shares ISA. However, you can spread the allowance across the five different types of ISA, but you’ll need to be aware of the UK 2023 tax year dates to ensure you pay your allowance before April 5th.

If you are splitting the ISA allowance across several types of ISA, please note that some ISA accounts are subject to individual account limits. For instance, Junior ISAs allow you to save up to £9,000 during the tax year, while Lifetime ISAs will enable you to put away £4,000 during the tax year. Also, the Junior ISA allowance does not affect your annual tax-free ISA allowance because this allowance is for your child.

Are ISAs tax-free if they are already existing ISA accounts? The answer is yes, and you can choose to transfer your ISA by consolidating your old inactive accounts into a single new account. The transfer from previous years will not affect your tax-free ISA allowance for the current tax year.

Claiming back tax

Some types of savings products pay tax-free interest regardless of your income or any other savings interest you receive. Having said that, the majority of savers no longer have to save into an ISA to earn tax-free interest because of the introduction of the personal savings allowance.

The individual tax allowance for the current tax year is £20,000, which means that you can still save tax-free even when you are an additional rate taxpayer.

If you suspect that you have paid more tax than you should have on your savings and investments, you will have to complete an R40 form which you can download from the GOV.UK website.

Fee charges on Stocks and Shares ISAs

Stocks and Shares ISAs often outperform other forms of saving – including Cash ISAs – over the long term. Although the difference in interest rates can be significant, it may not be huge. However, if you’re not careful with how your Stocks and Shares ISA is set up, the fees that you are charged could make the proposition less attractive by eating into your profits.

What are the tax advantages of Stocks and Shares ISAs?

When all is said and done, the tax advantages of Stocks and Shares ISAs are significant. First of all, you have your £20,000 per annum ISA allowance, which is tax-free. Then, the growth of your investments will not be subject to capital gains tax.

Do I pay tax on ISA withdrawals?

Are ISAs tax-free when you withdraw? Yes, you don’t lose any tax breaks by withdrawing cash from your ISA. You will not pay taxes on ISA withdrawals from investment profit, interest, or dividend income in the UK. You can withdraw any amount of money tax-free because investments within an ISA are protected from income tax, capital gains tax and dividend tax.

Withdrawing money from an ISA will depend on the type of ISA. You can take out money from a flexible ISA account without affecting your annual ISA allowance in the same tax year. The withdrawal flexibility is currently only available in the UK through Cash ISAs, Innovation Finance ISAs, and cash held within Stocks and Share ISAs.

However, penalties or fees could be associated with withdrawing money from certain types of ISAs, such as a Lifetime ISA or non-flexible ISA. So be sure to keep that in consideration when choosing the best ISA that fits your needs and financial goals.

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Do you have to declare an ISA on your tax returns?

No, you don’t need to declare any interest or gains from your savings or investments when filing your tax return. However, don’t forget that your ISAs have tax-free interest and gains.

Compound tax-free returns

A Stocks and Shares ISA is a tax wrapper that has been designed to protect your investments from both income tax and capital gains tax. Over a period of time, this can have a significant effect. If money is left in an ISA, it will be able to take advantage of the wonders of compound interest returns. In other words, the interest is added onto the investment, which grows and attracts even more interest year on year.

Are ISAs free from inheritance tax?

Sadly, ISAs are not exempt from inheritance tax. Are ISAs free from tax when inherited by a spouse? The answer to that question is yes, your spouse or civil partner is exempt from inheritance tax. When you die, your spouse or civil partner will inherit the value of your ISA as an extra allowance called Additional Permitted Subscription (APS) and it is independent of their annual ISA allowance.

However, if you decide to leave your inheritance to another beneficiary besides your spouse or civil partner, then that person inheriting your assets will be liable for Inheritance Tax as ISAs lose their tax benefit upon death.

Are ISAs tax free if they form part of your estate when you die? Unfortunately, beneficiaries have to pay inheritance tax on ISAs that form part of an estate as long as they are not your surviving spouse or civil partner. It’s important to see a specialist solicitor for detailed legal guidance as inheritance tax rules can be complex.

Outmanoeuvring inflation

The spectre of inflation is a constant worry. It is ever-present, and unless your savings are protected, it can erode their value over time. It is certainly something to worry about with a Cash ISA because, currently,  interest rates are not that much higher than the inflation rate.

The Bank of England’s inflation calculator indicates that inflation has reached an average of 2.7% per annum – in 2021, they peaked at a 10-year high of over 5%. Compare this to the fact that interest rates on Cash ISAs are generally below 2%, and it is a clear indicator that in several years, the actual value of your savings and investments could easily have shrunk.

This is when a Stocks and Shares ISA can come into its own because the interest rates are generally much higher and regularly outperform inflation, meaning that in real terms, your money can be worth even more over the long term. However, you have to bear in mind that with Stocks and Shares ISAs, investment values can go down as well as up.

To help you understand the Stocks and Shares ISA tax implications, we’ve created a short FAQ section.

Do you pay tax on Stocks and Shares ISA accounts?

As long as you stick within your personal annual ISA allowance of £20,000, your contributions will be completely tax-free. You can spread your contributions across all the five types of ISA or put the total sum of £20,000 into one type of ISA account. However, it would be best to remember that the maximum annual allowance with a junior ISA is £4,000.

The individual investor is responsible for ensuring that he or she does not exceed the annual ISA allowance in any one tax year. If you think you may have done this accidentally, you should contact your ISA provider and HM Revenue and Customs. None of the overpayments will be entitled to any tax relief, and HMRC could penalise you.

Is Capital Gains Tax payable on stocks and shares ISA investment growth?

The situation with Stocks and Shares ISA capital gains tax is quite clear. You will not pay any tax on the growth of your investment or any returns or interest. In addition, you will not pay tax on dividends in your post portfolio, nor will you pay any capital gains tax on any profits your Stocks and Shares ISA makes.

Do I pay tax on Stocks and Shares ISA withdrawals?

You don’t pay tax on Stocks and Shares ISA withdrawals. However, withdrawing money from a Stocks and Shares ISA tax-free wrapper and saving it in other types of investment accounts means that the money loses its tax-free status. Should you withdraw money from an ISA into which you’ve subscribed during the current tax year, the balance of your ISA allowance won’t be adjusted. This means is that if you add those funds back in at a later date, they can still count towards your overall annual ISA allowance.

What about Stocks and Shares ISA tax on dividends?

Regardless of the size of any dividends you receive from the stocks and shares in your Investment ISA, you will not pay any tax.


Do you pay tax on a Stocks and Shares ISA?

No, a Stocks and Shares ISA is a tax wrapper, so it is free of tax. You don’t have to pay Capital Gains Tax (CGT), Income Tax and Dividend Tax on stocks and shares ISA.

Are Stocks and Shares ISA completely tax-free?

No, even though a Stocks and Shares ISA is a ‘tax-sheltered’ investment account, it is not totally tax-free. Stocks and shares ISA is not protected from Stamp duty, Inheritance tax and Corporation tax.

Do you have to declare Stocks and Shares ISA on your tax return?

No, you don’t have to declare Stocks and Shares ISA (interest, income or capital gains) on your annual tax return.

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