25 years of ISA tax savings will more than double in just 10 years

• The total capital gains tax (CGT) saved since ISAs were launched in April 1999 amounts to over £9,000
• This is based on a higher-rate taxpayer who invested the full ISA allowance over the period, achieved a return of 7% a year, and withdrew funds held in the account after 10 years and every five years thereafter
• The shrinking CGT allowance means a higher-rate taxpayer investing the entire ISA allowance could save £18,534 in CGT over 10 years.

The new tax year marks the milestone 25th anniversary of the ISA, which has developed into a popular account, allowing individuals to shield investments and savings from tax on gains, dividends and interest payments.

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The total capital gains tax (CGT) saved over the period amounts to just over £9,000, according to new calculations by interactive investor, the UK’s second-largest investment platform for private clients. This is based on a higher-rate taxpayer who invested the entire ISA annual allowance, which has periodically increased over the years, at the start of April each year. 

It also assumes investment growth of 7% a year, the complete withdrawal of funds held in the pot after 10 years, to buy a house for example, and further withdrawals every five years thereafter – each triggering a capital gains tax event.

The £18,500 tax liability from shrinking CGT allowance

Over the past 25 years, the CGT allowance and tax rate has changed. The CGT allowance increased from £7,100 in the 1999/2000 tax year, peaking at £12,300 from the 2020-21 tax year and then slashed to £6,000 in the current tax year. The allowance is set to be halved to £3,000 in the new tax year (2024/25).

This means that a higher-rate taxpayer investing the entire ISA allowance in April from the start of the new tax year could save £18,534 in CGT over 10 years if no withdrawals are made, assuming the CGT allowance and tax rate remain unchanged over the period and a 7% annual rate of return.

Of course, not everybody can afford to use their full ISA allowance each year, and investments can go down in value as well as up. 

The calculations are for illustrative purposes only to show the value of tax efficiency offered by ISA.

Myron Jobson, Senior Personal Finance Analyst, interactive investor, says: “ISAs have been a success story, with around 22 million adults in the UK holding savings and investments in an ISA, valued at approximately £741.6 billion. While few have been in the fortunate position to make full use of the annual allowance every tax year, many have benefited from not insignificant tax savings when they have sold their investments.

“The significant cut to both CGT and dividend tax allowances provides further impetus to make the most of the tax-efficient ISA wrapper if you haven’t already done so. The cut to the respective allowances means that those with more modest portfolios held outside a tax wrapper face a growing tax burden as their investments grow.

“It is important to remember that CGT kicks in once an investor decides to sell an investment and realise gains that exceed the tax-free threshold. So, an investor who invested modest amounts and has seen their investments grow significantly over the years could face a substantial tax bill once they sell their stake.

“It is a similar story for dividend tax – an investment that has grown in value over time due to regular contributions and investment growth could trigger a tax event when the dividend is paid out.

“Like the ISA allowance, CGT and dividend allowances work on a use it or lose it basis. As such, an option for those facing a tax bill is to delay capital gains by spreading them across two tax years. Theoretically, they could sell half their position on 5 April and sell the other half on 6 April – the start of the new tax year.

“Also, people forget that they can mitigate CGT and dividend tax by transferring assets between partners and spouses, which are usually tax-free. This is because we each have our own allowance, meaning that married couples could potentially benefit from double the CGT and dividend tax allowances. The benefit is greater if the recipient who sells the assets is subject to a lower tax rate."

Alice Guy, Head of Pensions and Savings says: “With a rising tax burden and shrinking allowances, protecting your assets from tax has never been more important and could make a big difference to your long-term wealth. 

“When it comes to retirement, ISAs often form are key part of people’s retirement planning and many people use them to supplement their pension income in retirement. 

“People love ISAs because they’re so flexible and simple, with no tax to pay when you make withdrawals. ISAs are especially popular and important for self-employed workers, who often need ready access to investments in case their business takes a downturn or they have unexpected expenses.”

Bed and ISA 

The shrinking CGT allowance provides the impetus for investors to invest through a tax-efficient wrapper if they haven’t already done so. The same goes for the dividend tax allowance, which is set to be cut from £1,000 to £500 in the new tax year.

Myron Jobson says: “Shifting investments into an ISA protects future gains and dividends from the clutches of tax. Known as Bed & ISA, the process is a valuable tool as part of a broader portfolio spring clean strategy. The transfer, however, will involve selling and buying back shares, which could trigger a capital gains tax bill.” 

“Bed & ISA is a tried and tested route to wrapping existing investments to generate the long-term benefits of a tax-efficient ISA – which over the long term is likely to outweigh the charges that might apply.”