Individual Savings Accounts (ISAs) started out as a simple way to save, but over the years rules and regulations related to ISAs have made them just a bit more complicated to deal with. Despite calls to simplify and streamline the process of ISAs, not much has changed since April 2017.
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Recently, after the Autumn announcement, there has been some ISA reform. So, with the end of the tax year approaching, it’s a great time for a refresher on how helpful ISAs can be as part of your financial plan.
Even though there are a variety of options to choose from when it comes to ISAs, they all share a number of common features such as tax privileges, annual limits, and restrictions on who can run ISAs. Most doctors and dentists strive to max out their ISA allowances annually in order to meet their long-term financial goals. Here are a few things to keep in mind when working with ISAs.
ISA tax benefits
Arguably, the most important aspect to understand with ISAs is the tax treatment. Here we break down how the different type of accounts differ:
Stocks and shares – While all capital gains and dividends are free from taxation, foreign withholding taxes may still apply. Within an ISA, dividends received are ignored when under your allowance (£1,000 in 2023/24 and £500 in 2024/25). But outside of an ISA, tax on dividends can range from 8.75% for basic rate taxpayers to 39.35% for additional rate taxpayers. Additionally, interest on bond and cash investments is tax free and does not count towards your personal savings allowance.
Cash component – Very simply, all interest is tax free.
Lifetime ISA – With a LISA, investors receive a 25% tax free government bonus on their contributions until they reach age 50. So, if you max out your allowance and save £4,000 in a tax year, the government will add an extra £1,000 to your LISA. There are stipulations, though. You cannot withdraw funds from a LISA before you reach age 60, otherwise you will be subject to a 25% penalty on the amount withdrawn. The two exceptions to this rule are if your LISA is at least 12 months old and the money is going to be put towards the purchase of a first home up to £450,000 ; or if you have become terminally ill.
How Dental & Medical Financial Services can help
As Individual Savings Accounts are a specialist area, they require input from professional, authorised financial advisors. The experts at Dental & Medical Financial Services can advise you on the best ways to utilise your ISA allowance each year to ensure you are maximising the tax benefits while staying on track to meet your financial goals. Contact our team to save before the end of the tax year.