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The tax benefits of an ISA explained

One of the primary reasons people choose an ISA is the tax benefits. Every tax year, UK investors can put up to £20,000 away and have any returns shielded from tax. 

Tax benefits of an ISA: Summary Table

😊️ Is an ISA a tax-free wrapper?Yes, it is
🆓 How much ISA allowance is tax free?£20,000 per tax year
❓ What are the tax benefits of an ISA?•No dividend tax
•No capital gains tax
•No income tax
•No declaration on tax return form
🫶 What are the benefits of no taxes on an ISA?Your investment can grow faster

Between 2011 and 2017, this annual limit increased from £10,200 to £20,000, where it remains today. This means that, over a 25 year period, an investor with the means to do so could save half a million pounds and pay absolutely no taxes on the profits. 

A lot of people, however, are unaware of how impactful those tax savings can be. So, what are the biggest tax benefits of investing in an ISA?

You won’t pay tax on dividends from shares

Inside your ISA wrapper, all dividend income is completely tax-free. Outside of an ISA, only the first £2,000 you earn every year is free from tax and, beyond this, the amount you pay is based on your income tax band. That’s 7.5% for basic-rate taxpayers, 32.5% for higher-rate taxpayers and 38.1% for additional rate taxpayers. 

You won’t pay any tax on interest from bonds

These returns are protected within your ISA wrapper. Assets like corporate bonds, which are more present in lower risk portfolios, rely on interest for their returns. This is similar to the interest one earns in a bank account. 

You won’t pay any capital gains tax

The tax allowance for capital gains outside of an ISA wrapper is currently £12,300. Inside a stocks and shares ISA, you’ll pay absolutely none. For basic-rate taxpayers, capital gains tax is 10%. For both higher-rate and additional-rate taxpayers, it’s 20%. 

Depending on the size of your investment portfolio, these tax benefits can have a huge impact, particularly over time. 

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So, why not take full advantage of the ISA allowance and tactically position your money to grow tax-free? We’ve spoken before about the potential for investment portfolios to help protect against inflation, but tax efficiency is yet another reason to get on top of your finances. 

With your Moneyfarm account, you can have multiple ISA portfolios within the same tax wrapper. This means that you can have a number of different pots for different financial goals. Whether it’s retirement or putting your child through university, having a tax-efficient way to do both can make a huge difference. 

If you want to discuss your options or talk through your financial goals in more detail, don’t hesitate to get in touch with a Moneyfarm investment consultant.

FAQ

Do I have to pay tax on an ISA?

No, an ISA is tax efficient. Interest earned in a cash Isa is tax-free. You don’t pay income tax on interest and capital gains tax on interests earned on investments held in an ISA. Withdrawals are tax-free, and ISAs are also free of dividend tax.

What is the tax allowance of an ISA?

The ISA tax-free allowance for 2022/23 is £20,000. However, the excess amount will be subject to tax if you exceed the ISA limit of £20,000.

What happens to my ISA tax benefits when I die?

When you die, your ISA loses its tax-free status upon account closure or upon the completion of the administration of your estate. Otherwise, your ISA account will be closed by your provider 3 years and 1 day after your death, but it will maintain its tax benefits until account closure. If you died on or after 6 April 2018, your spouse or civil partner could inherit the value of your ISA tax free. This inherited one-off ISA payment is called “Additional Permitted Subscription (APS)”.

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As with all investing, your capital is at risk. The value of your portfolio with Moneyfarm can go down as well as up and you may get back less than you invest.