I’m sure we can all agree it’s a pain seeing such a large chunk of our earnings draining away down a tax plug hole. However, making use of ISA accounts is saving Brits billions in tax each year!
Here’s what you need to know about using ISAs (individual savings accounts) to your advantage, and how I’d use them to pay less tax.
How do ISA accounts work in the UK?
There are actually a number of different types of ISAs available in the UK. Mention of these accounts may not get your heart racing, but it should!
You don’t need to hold every type of ISA to be successful. But you can have a number of different ISAs at one time. Each one could be beneficial to you depending on your circumstances and goals.
I’m sure you’re not a fan of paying lots of tax – no one is. Using an ISA is a completely legal and above-board way to pay less tax.
How much will ISAs save people in income tax?
According to the latest ONS tax relief statistics, ISAs are going to save Brits a whopping £3.7 billion in income tax in 2021 alone.
This is a monster saving on tax payments that would otherwise be coming out of your pocket. As Sarah Coles, senior personal finance analyst at Hargreaves Lansdown, explains, “We’re heading into a period of much higher taxes – where tax as a share of GDP is at its highest since the 1950s.
“The government is firmly in claw-back territory, using the gap between the height of the pandemic and the next election to attract as much cash as possible to pay back the unimaginable levels of borrowing required to get us through the crisis.
“It makes tax breaks more valuable than ever, so if you haven’t taken as much advantage of your ISA and pension allowances as makes sense for you this tax year, it’s well worth considering what you can free up this side of the April deadline.”
What are the best ways to use an ISA to pay less tax?
The best ways to use the various accounts will depend on your circumstances. But here are some ways to use them for your benefit.
1. Savers
If you’re a saver, even the best savings accounts pay minimal interest right now. But a cash ISA can still be helpful if you want to be conservative with your savings.
For basic rate taxpayers, £1,000 of interest is tax free. If you’re a higher rate taxpayer, this allowance is just £500. So, using a top-rated cash ISA can be an excellent way to simplify your savings because you don’t have to pay tax on any interest.
2. Investors
For those of you looking to beat inflation and build wealth over the long term, there’s no better account than a stocks and shares ISA. You can put in up to £20,000 each year and you don’t have to pay any capital gains tax (CGT) or dividend tax on the investments.
This means they’re a great pick for building wealth or drawing income. Because any money you take out won’t be classed as part of your income. I can’t overstate how brilliant these accounts are for holding your investments. Why not check out our list of top-rated stocks and shares ISAs?
3. Parents
There’s even a Junior ISA you can use for the children in your life. Not only are these accounts a great way to teach children about personal finance you can also build them some serious wealth over the years by using the full £9,000 allowance.
Without wishing to sound like a broken record, there’s no tax to pay! So, by the time the children are old enough to access the cash, it could be a substantial pot.
4. Homebuyers
If you’re saving for a deposit for your first home, it’s hard to beat a Lifetime ISA (LISA). You have to be under 40 to open one, but the benefits are pretty astounding.
You can put in up to £4,000 each tax year and the government will top it up with another £1,000. That’s a free 25% bonus! Even professional investors would struggle to get a consistent 25% return each year. So if you’re saving for a home deposit, these accounts are tax-friendly and give you a whopping return!
Please note that tax treatment depends on the individual circumstances of each client and may be subject to change in the future. The content in this article is provided for information purposes only. It is not intended to be, nor does it constitute, any form of tax advice. Readers are responsible for carrying out their own due diligence and for obtaining professional advice before making any investment decisions.
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About the author
George is a writer and qualified financial adviser focused on educating others in personal finance & investing.
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