Investment and taxes

Did you know there’s a way to save and invest without paying tax on the money you make?

Taxes are paid through your job, and on the things you buy every day. They help pay for public services like schools, hospitals, and roads. You also sometimes have to pay tax on the profit your investments or savings earn you. But did you know there are ways to save and invest your money without paying tax on what you earn from it?

In this video, we’ll show you how that works, and how you can make your money go further.

This video is about Individual Savings Accounts. In the late 1990s, the UK government created a personal tax product called an Individual Savings Account, also known as ISAs.

ISAs allow people to invest a specific amount tax-free from their earned income per tax year. This varies between ISA types and might change year to year. Typically, you must be a UK resident to open or pay into an ISA.

However, if you are assigned overseas as a member of the armed forces (or another Crown Servant), you, your spouse or civil partner, and your children can still open and pay into an ISA while overseas. You just need to tell your ISA provider that you’re serving overseas, or that you’re the spouse or civil partner of someone who is.

Because of your job or situation, it might look at first like you don’t meet these rules, but as part of the armed forces community, you may be exempt from the usual residency rules.

You can find more information on gov.uk

A tax year runs approximately from April to the end of the following March. You can save in cash or invest in stocks and shares via an ISA, subject to the annual limit.

There are other types of ISA for different stages of your life.

The Junior ISA is for children and can be used to help save for their future until they are 18. Or the Lifetime ISA which can help young adults save for a home.

It’s important to research what works best for you. These are just a few examples which could be subject to change.

Any money you make inside an ISA stays tax-free.That includes profits when your investments grow in value called capital gains, or income you receive like company payouts, called dividends, or bond payouts.

You don’t need to worry about reporting these earnings, or about doing a self-assessment tax return for this reason alone. The idea is that any gains within the ISA – capital gains through investment growth, or income – through dividends or bond payouts that are reinvested can be accumulated in the ISA without the taxman coming knocking.

Therefore, you don’t need to declare income made and reinvested within ISA savings on your tax returns, for example. As long as your account stays open, if you withdraw money, you don’t pay tax.

But outside of an ISA it’s different, you may need to register for Self Assessment, 1) if your dividends go above a certain amount in a year, you’ll pay dividend tax.

And 2) if your total investment gains go above a certain amount in a year, you’ll pay capital gains tax. Even things like trading cryptocurrencies are included.

The rate at which you are charged will vary depending on what rate of tax you pay, as well as the type of asset. You can find specific details on the gov.uk site or watch our video called ‘understanding payslips’ to learn more about tax bands.

Ultimately, the benefits of ISAs are that they protect your savings from tax as your savings and investments grow. ISAs are one of the simplest and most effective ways to build your future savings.