Saving or investing in an ISA offers some great tax-related benefits.
The best part is, you don’t pay tax on the growth, returns or interest in your ISA. This means, if you have a cash ISA, all interest earned in the ISA is always tax free. If you have a stocks and shares ISA, you don't pay tax on any dividends from shares and you don’t pay capital gains tax on any profits made from the investments.
What’s more, having an ISA should simplify your tax return. Most people don’t have to report the income and capital gains from their ISAs on their annual tax return.
It’s worth remembering that the tax rules for ISAs can change, but the government usually announces these changes in advance of them taking affect. Some of the tax benefits may depend on your personal circumstances.
Investing in a stocks and shares ISA offers three main tax advantages.
1. You don't pay tax on dividends from shares.
All dividend income inside your stocks and shares ISA remains tax free. In comparison, for earnings outside an ISA, for the tax year 2020/2021, only your first £2,000 of dividends earned in the tax year are tax free. Beyond this allowance, you pay tax on dividends depending on your income tax band: basic-rate taxpayers pay 7.5%, higher-rate taxpayers pay 32.5%, and additional-rate taxpayers pay 38.1%.
2. You don’t pay capital gains tax.
Any gains made by investments within your stocks and shares ISA are not subject to capital gains tax. Outside a stocks and shares ISA, the capital gains tax allowance is £12,000 for the current tax year. So, if you’ve got investments outside an ISA, you’ll pay tax on any profits above this threshold: basic-rate taxpayers pay 10%, higher-rate and additional-rate taxpayers pay 20%.
3. You don’t pay tax on interest earned.
All interest earned from interest-bearing investments in your stocks and shares ISA are not liable to income tax. These investments include corporate bonds and gilts.