Henry Irving 11 March 2019
When you think about opening an investment account, it’s understandable that your first thought might be the investments themselves. But how you hold them can have a have a huge impact on your returns.
That’s why investing in a tax-efficient account like an ISA could be a great decision for any investor to consider. And why 2.8 million investors chose to invest in a stocks and shares ISA last tax year alone.
In this article, we look at some of the key benefits of investing in one of the most popular tax-efficient accounts. This is not personal advice. If you are unsure of the suitability of an investment for your circumstances, please seek advice.
Great tax benefits is the most obvious perk – it’s what ISAs are known for.
ISAs offer the opportunity to grow your money free from UK tax. So if your investments go up in value, you won’t have to pay capital gains tax. And if your investments generate income, you won’t pay UK income tax either.
The investments are still the same whether they’re held in an ISA or not, but with the tax benefits saving you money, you could get higher returns overall.
Remember tax benefits and rules can change and the benefits of investing in ISAs will depend on your circumstances.
You can take money out whenever you like
Whatever your financial goals, there will be times when you want to access your money, such as for a deposit for a new home, an unexpected bill or even some help with retirement. Unlike some other tax efficient accounts, ISAs give you flexibility.
Although investing in ISAs is for the long term, you can withdraw money from your ISA at any time.
So whether you’re investing for 5, 10, 20 years or even longer, you can get hold of your money if and when you need it.
When ISAs (formerly known as PEPs) were introduced in 1987, you could only contribute a maximum of £2,400 that year.
But over the years it has risen significantly. This tax year you can put £20,000 into your ISA and shelter your money from tax immediately.
And those who started investing in ISAs from the beginning have really benefited. If you’d contributed the maximum amount to ISAs each year (using the full allowance) since they had started, you’d have sheltered just over £297,000.
On top of that, if for example you’d put your money into a fund tracking the UK stock market, you’d have a tax-free pot of £939,885.
Of course, there’s no guarantees that this performance will be repeated in the future. Investments can fall as well as rise in value, so you could get back less than you put in.
Focus on investment decisions, not tax decisions
ISAs allow you to make investment decisions free from the burden of tax. Sometimes investors might be reluctant to sell an investment when they probably should because they might pay capital gains tax on their profits. This can lead to poor and often costly financial decisions.
Investments in your ISA are free from capital gains tax and UK income tax, so you can buy and sell investments whenever you want to.
Make your finances simpler
Every year, millions of people are tasked with completing their personal tax return before the 31 January deadline. This year alone, over 700,000 missed that deadline and received fines from the government for late payments, according to HMRC.
Investing in ISAs means you’ve got one less thing to worry about. Since your investments are sheltered from tax, you don’t need to declare ISA investments on your tax return, making your life just that little bit easier.
Open or top your ISA before 5 April
The tax year ends on 5 April so time is running out to open your ISA for this year.
But don’t worry, starting your HL ISA is quick and easy, and takes minutes online.
If you’re a client, you can top up by logging into your account online.