ISAs could protect you from coming tax grab, say experts

18th March 2021 16:02

Marc Shoffman from interactive investor

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Government needs to raise cash to repay Covid-19 bill, and levy increases are likely.

The ISA could be a saver’s most valuable form of defence against the government’s coming tax grab, experts claim.

Chancellor Rishi Sunak stopped short of raising income taxes in the Budget earlier this month, but is set to freeze thresholds from 2022. The government needs to raise large amounts of money to repay the country’s growing bill for Covid-19 support measures such as the furlough scheme.

Currently, you can earn up to £12,500 before any income tax is charged.

This will increase to £12,570 from the new tax year on 6 April 2021 and will then be frozen until 2026.

The threshold for higher-rate taxpayers has also been frozen at £50,270.

That means savers could end up paying more tax as their pay increases.

Tax and advisory firm Blick Rothenberg says this makes maximising your yearly £20,000 ISA allowance vital.

Nimesh Shah, chief executive of Blick Rothenberg says: “Tax erodes a person’s wealth and the effect of freezing the various allowances compounds this issue further. 

“Given the allowances freeze and the 2020/21 tax year end approaching in a few weeks, tax wrappers are more important than ever.”

Shah highlights that using the £20,000 ISA allowance as well as the £9,000 that can be put into a Junior ISA, means a family of four could save up to £58,000 tax-free per year.

He adds: “If you don’t use your ISA allowance in one year, it’s lost – there’s no carry back or carry forward so it’s important to set a reminder every year.”

Using an ISA can make a big difference to investment gains.

As an example, someone aged 25 and contributing the maximum amount to their ISA - including the Lifetime ISA which offers a £1,000 tax-free bonus from the government) - can build £210,000 of savings in a tax-free environment over 10 years, according to Blick Rothenberg.

Using a conservative rate of return of 3% per year, a saver would have a fund worth £240,741 by age of 35.  

The same investment made outside an ISA would be worth £215,523, a difference of more than £25,000.

Holly Mackay, chief executive of product analyst Boring Money, says the tax threshold freezes have made tax-efficient investing more important.

She adds: “These freezes will become particular important in the context of inflation and interest rates in the coming years.

“As inflation rises, so the effect of a tax threshold freezes become more lucrative for the Treasury and more punishing for savers and investors.

For those holding investment accounts, it is crucial to take note of whether you are in a tax-efficient wrapper such as an ISA, or whether you may be liable to pay tax on any gains.”

These articles are provided for information purposes only.  Occasionally, an opinion about whether to buy or sell a specific investment may be provided by third parties.  The content is not intended to be a personal recommendation to buy or sell any financial instrument or product, or to adopt any investment strategy as it is not provided based on an assessment of your investing knowledge and experience, your financial situation or your investment objectives. The value of your investments, and the income derived from them, may go down as well as up. You may not get back all the money that you invest. The investments referred to in this article may not be suitable for all investors, and if in doubt, an investor should seek advice from a qualified investment adviser.

Full performance can be found on the company or index summary page on the interactive investor website. Simply click on the company's or index name highlighted in the article.

Please remember, investment value can go up or down and you could get back less than you invest. If you’re in any doubt about the suitability of a stocks & shares ISA, you should seek independent financial advice. The tax treatment of this product depends on your individual circumstances and may change in future. If you are uncertain about the tax treatment of the product you should contact HMRC or seek independent tax advice.

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