“Over the past 20 years of the ISA, the turnaround has not only been massive but transformative.”- Former Prime Minister Gordon Brown, who, as chancellor, launched ISAs back in 1999.
There are a number of reasons why an ISA might be right for you. For example, with a stocks and share ISA, you’ll have the opportunity to make the most of the following benefits:
If you’re interested in markets and the potential returns you can get from investing, then opening an ISA can be a good place to start as an investor. They are easy to use and adaptable to your needs. You can set your own risk level, choose your own investment style and, in many cases, you can keep an eye on how the money in your ISA is doing from your smart phone.
ISAs give you the freedom to manage your money depending on your goals and circumstances. Unlike a pension, which has conditions on withdrawals, you’re free to choose how much you invest and when with an ISA-within its tax allowance. If you have some extra money, which you’d like to put into the markets, then adding it to your stocks and shares ISA as a one off, or as a regular contribution, is straightforward. Likewise, you can invest for as long as you need, knowing that ISA withdrawals are also straight forward.
Many of us worry that inflation can mean that the cash in our bank account is losing its value. While investing money is never without risk, a stocks and shares ISA can be a good option if you are willing to take on some risk to mitigate inflation. Nutmeg’s past performance shows that over the last five years a stocks and shares ISA at risk level 2 out of 10 would still have given you returns of 10%. By contrast, the Bank of England’s inflation calculator shows inflation has risen an average of 3% every year over the same time period.
ISAs protect your money from capital gains and income tax because they area ‘tax wrapper’. This can make a big difference over time: if you leave that money invested in the ISA, you’ll potentially be making the most of the extraordinary power of compound returns. You can read more about the tax benefits of ISAs below.
Finally, ISAs can serve a variety of purposes. Stocks and shares ISAs can help you begin investing in the market, but you can also use a Junior ISA (JISA) to put money aside for your children to give them a great financial step up when they reach 18. You might also want to consider a Lifetime ISA (LISA) which helps you put money aside for your future or for a first home with a 25% government bonus (up to £1,000 a year) on top of your contributions.
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 2022/23, 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 8.75%, higher-rate taxpayers pay 33.75%, and additional-rate taxpayers pay 39.35%.
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 £12,300 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.
As with all investing, your capital is at risk. The value of your portfolio with Nutmeg can go down as well as up and you may get back less than you invest. A stocks and shares ISA may not be right for everyone and tax rules may change in the future. If you are unsure if an ISA is the right choice for you, please seek financial advice.