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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. 

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. 


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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. 

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.

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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.