A person can save up to £20,000 a year in ISAs and investing funds in the account is a good way to reduce a person’s tax liability, an expert has said. Sarah Coles, head of personal finance at Hargreaves Lansdown, said people could save more tax than they might think by using ISAs.
She explained: “Your ISA could save you more tax than you think. We’re alive to some of the tax-saving potential of ISAs this year, because of the dramatic cuts to the dividend and capital gains tax allowances and the insidious creep of income tax.
“However, there are also some less well-known ways that the ISA can slash your tax bill. It can help parents facing the High Income Child Benefit tax charge, high earners wrestling with the loss of their personal allowance and employees cashing in on a workplace share scheme.
“And while the more obvious tax savings run into billions of pounds, the lesser-known tricks can help those who have crossed the most punitive thresholds.”
Ms Coles spoke about three lesser-known tax breaks a person may want to consider when looking at ISAs.
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The High Income Child Benefit tax charge
This tax charge affects Child Benefit claimants when one parent in their household has taxable income of £50,000 a year or more.
The claimant will be required to pay back one percent of their payment for every £100 over the limit, meaning they will have to pay back the full amount when the parent’s taxable income reaches £60,000.
A person can reduce their taxable income by moving their savings into an ISA and taking part of their income from this, reducing how much of the tax charge they will have to pay.
For each £2 above the threshold, an individual’s personal allowance reduces by £1, and is removed entirely when their income reaches £125,140.
Ms Coles said: “By moving income-generating savings and investments into an ISA, high earners can enjoy a double tax break: keeping more of their personal allowance, which lowers their overall income tax bill, plus any income or gains within the ISA are tax-free too.”
A person can check how much income tax they are due to pay this financial year using a checker tool on the Government website.
Tax on gains from Sharesave schemes
Sharesave schemes have a specific rule that allows a person to avoid paying capital gains tax on the increase in value of their shares. This also applies to Share Incentive Plans.
If the shares are transferred into an ISA within 90 days of the scheme maturing, there will be no capital gains tax to pay on them.
This is particularly important as the threshold for capital gains tax is reducing from £12,300 a year to £6,000 a year this April, and is being halved again next April to £3,000.