Investment and taxes
InvestingUnderstand how ISAs work and how they can help you grow your money over time.
Transcript
Did you know there’s a way to save and invest without paying tax on the money you make? This video is about individual savings accounts, also known as ISAs. In the late 1990s, the UK government created these personal tax products. We will give you an idea on the best way to save and reduce the tax you pay.
ISAs allow people to invest up to a capped amount of their earned income per tax year. 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 an annual limit. There are other types of ISAs too for different stages of your life. The Junior ISA is for children and can be used to help save for their future until they’re 18. The Lifetime ISA 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 report these earnings on your tax return. 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.
If your dividends go above a certain amount in a year, you’ll pay dividend tax. And if your total investment gains which also have a specified limit go over this amount, 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.
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.
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