FAQ About Individual Savings Accounts
What are the tax benefits of investing in an ISA?
The primary tax benefits of investing in an ISA are that the interest, dividends, and capital gains generated within the account are tax-free. This means that your savings and investments can grow without being subject to income tax or capital gains tax, making ISAs a valuable long-term savings vehicle for many individuals.
Example:
Suppose you invest £10,000 in a Stocks and Shares ISA and choose a range of stocks and bonds. Over the course of the year, your investments generate £500 in dividends and £800 in capital gains. Without an ISA, these returns would typically be subject to taxes:
Dividends: The first £2,000 of dividend income is tax-free in the UK (as of 2021). Any amount above this threshold is taxed at 7.5% for basic rate taxpayers, 32.5% for higher rate taxpayers, and 38.1% for additional rate taxpayers.
Capital Gains: The annual tax-free allowance for capital gains is £12,300 (as of 2021). Gains above this threshold are taxed at 10% for basic rate taxpayers and 20% for higher and additional rate taxpayers.
In this example, your dividends (£500) fall within the tax-free allowance, so you wouldn't pay any tax on them regardless of whether they were in an ISA. However, if your dividends were higher, they could become taxable outside an ISA. Your capital gains (£800) are also within the tax-free allowance in this case, but if you had additional gains from other investments, holding them within an ISA would protect them from taxation.
By investing in an ISA, you shelter your returns from taxes, allowing your money to grow more efficiently and maximize your long-term savings.
