An Independent Savings Account (ISA) is a great way to save both money and tax. There are a variety of types of ISAs, all designed to help you save towards a particular goal. They can also help protect against anticipated tax grabs – the humble ISA works harder than you think.
This does not constitute advice and advice should be sought in all instances before acting on it. The Financial Conduct Authority does not regulate tax advice.
ISA refresher
An Independent Savings Account is a tax-efficient investment wrapper that allows you to hold a range of investments, including bonds, equities, property, multi-asset funds and even cash, giving you control over where your money is invested.
You can put the entirety of your £20,000 into one type of account, or you can spread it across the four available options:
- Cash ISA
- Stocks and shares ISA
- Innovative Finance ISA
- Lifetime ISA (maximum of £4,000/year)
Don’t forget that ISAs aren’t just a way of sheltering your money from tax, they are investments that stand on their own.
If you complete a tax return, you don’t need to declare any investments held in your ISAs. And for people that need to file their own returns, less work to worry about it is always better.
Using your ISA allowance is more important than ever
To help aid economic recovery in the wake of the coronavirus pandemic, Chancellor Rishi Sunak introduced a host of tax changes to fund the £65bn relief effort. By using your ISA allowance to the fullest you can avoid losing thousands of pounds.
The effects of the tax changes will be felt by taxpayers over the next few years. Amongst the changes was a freeze on personal tax allowances and bandings for the next 5 years.
This combination is a double blow but only highlights the importance of maximising the tax wrappers available to you.
Not only are income and capital gains earned from investments within your ISAs not taxable, but withdrawals are also tax free, the only exception being a 25% early withdrawal penalty for Lifetime ISAs.
Remember that there is also a Junior ISA available to help you save a maximum of £9,000 per child under the age of 16. Again, you could divide your allotment into a cash Junior ISA and a stocks and shares Junior ISA however you want and your goals for the money will help determine the split.
Taking the maximum allowance limits into consideration, a family of four could save up to £58,000 a year across all available ISA accounts.
ISAs vs regular investments
ISAs allow your money to be sheltered from taxation but they also help to grow your wealth.
Each year, your funds increase thanks to savings rates, so it’s important to find an ISA with a good interest rate.
The huge bonus of an ISA compared to a regular investment account is that you’re essentially getting something from nothing and the government can’t touch your gains – over time comparing rate of growth between two similar investments, you could earn thousands more by choosing and ISA instead.
Talk to a professional
As it’s still close to the beginning of the tax year, that means you have plenty of time to get a plan of action together. Start your savings contributions as soon as possible so you’re maximising the amount of time your money is sheltered from tax.
As a busy dental or medical professional, finding the time to work through your finances can be tricky. Our financial advisers will be able to find ways to help you streamline your finances, maximise your investments, and provide guidance on ways to save money every tax year, so get in touch now.
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