We have all heard and aware of Individual savings account but not many of us understand the benefits and tax rewards associated with ISA’S. The aim of todays tax tip is to explain how ISA’S could generate tax free income stream for you.
You could invest up to £20,000 into ISA’S (2020/21 limit) and the proceeds from which will be free from personal taxation. The best time to invest into ISA’s is the beginning of tax year, which is 6th of April 2020.
If you use an ISA to invest £15,000 for 10 years, it will create pot of £150,000 plus accumulated interested which is generating tax free income. In some cases ISA could even be more beneficial than pension, as the funds could be taken out anytime and there is no requirement to reach the retirement age.
It is always easier to explain with an example so here goes.
Example:
You have invested £20,000 into shares which gave you a gain of £15,000 after 10 years. You want to cash it in and have already used your capital gains annual exemption somewhere else. The tax payable on the gain of £15,000 will be £3000.
If you invested into shares using your ISA, you will be pleased to know that you will not pay any tax on the £15,000 gain.
Comparison using a Gain of £15,000
Investment using ISA – £0 Tax
Investment without using your ISA – £3000 Tax
Congratulations, you have just saved £3000 of your children’s inheritance.
Please note: that this does not constitute as an advice and professional advice must be sought before taking any decision.