Removing tax from the equation, or 'why invest in an ISA'?

Paying tax on your investment gains can really diminish your profits, but you may be able to remove tax from the equation.
Removing tax from the equation, or why invest in an ISA
Reading time: 5 mins

Tax is omnipresent. Just take a minute to think about it.

You pay tax when you earn money, when you spend money, and when the money you’ve saved earns more money. There seems to be no escaping it! But imagine for a second if you could remove tax from at least one of these equations?

We have a solution for you that isn’t shady or unethical. In fact, it’s something that the UK government has created and considered.

The answer to removing tax are Stocks and Shares ISAs, and here’s why.

 

Your money, but with more potential
Giving your money more potential probably sounds appealing, but paying tax on your investment gains won’t. And that is where Stocks and Shares ISAs come into play.

Individual Savings Accounts, or ISAs, are a little gift from the government, letting you currently invest up to £20,000 each year (subject to change) without having to pay tax on income or capital gains. This means that you get to keep any profits, or dividends, that you make. And that’s important, because even if you only maxed out the £20,000 limit for one year – it could be worth £32,433 in 15 years1!

 

Take a long-term approach
As the ISA allowance refreshes each tax year, there’s the potential that you could put away £20,000 tax-efficiently each year. While that’s already a significant amount, it has the potential to increase by taking a long-term approach to investing and drip-feeding your account. By investing monthly, you could benefit from buying investments when the market is low and could help smooth out your overall performance.

For example, to reach the ISA limit, each month you’d need to invest £1,666 – which over 15 years would be an initial investment of £299,880. But by investing with a Stocks and Shares ISA, this could be worth as much as £385,090 in 15 years2! That’s a potential profit of £85,210, which averages out at around £5,680 for each year you were invested.

 

Give more power to compounding
What is compounding? The easiest way of thinking about compounding is that when your investments earn profits, called dividends, you invest these gains. This then means that you’ll have more money invested, which could increase your potential to earn more profit. Each time you reinvest your profits, your investment pot could grow, and over the long term, this amount could really add up.

As you don’t have to pay tax on any income or capital gains in Stocks and Shares ISAs, compounding can really come into its own. Instead of losing any of your dividends to tax, you can reinvest the full amount and unlock the full potential of this investment phenomenon.

 

 

You’re not locked in
With tax incentives like this, many people think that their money will be locked away for long periods. It’s a common worry, especially for people who have previously locked their money into a long-term Cash ISA account to get higher interest rates.

But you’ll be delighted to know that, even with these excellent tax benefits, your money isn’t locked away with a Wealthify ISA. You can add to it or take money out whenever you want, at no extra charge – invest as much or as little as you want in the way you want.

There are some conditions though – there are four types of ISA, and you can only open and pay into one of each per tax year. Plus, your tax-allowance is spread across all the ISAs that you open. So, for example, if you opened a Stocks and Shares ISA and a Cash ISA you could put £10,000 in each to reach your £20,000 limit. This amount can be split however you want, as long as you don’t exceed your allowance. It’s worth noting that you can only put £4,000 each tax year into a Lifetime ISA, but it counts towards your £20,000 limit.

 

Transfer previous years’ tax allowance
If you’re unhappy with your ISA provider, or if you’re looking to move funds from a Cash ISA into Stocks and Shares, then don’t withdraw this money – transfer your ISA.

The government has made allowances for people to change their provider without having a negative impact on your tax allowance. So, for example, if your existing ISA was worth £30,000, then you would be £10,000 over the current allowance. But, if you hadn’t put any money in for the current tax year, then you could transfer the entire £30,000 and still have your £20,000 allowance for the year.

This isn’t as complicated as you may think. Just find the provider you want to move to, fill out their ISA transfer form and they’ll do the rest – opening your account and moving your money over for you. And, if you’re moving to Wealthify, we’ll create your investment Plan in line with your requirements, factoring in the level of risk that’s right for your needs and if you opted for our Ethical Plans.

 

References:

1: This is the projected value for a Confident Plan (Medium Risk Plan). This is only a forecast and is not a reliable indicator of future performance. If markets perform worse, your return could be £2,123. If markets perform better, your return could be £48,290. Values correct as of 03/02/2020.

2: This is the projected value for a Confident Plan (Medium Risk Plan). This is only a forecast and is not a reliable indicator of future performance. If markets perform worse, your return could be £308,967. If markets perform better, your return could be £480,028. Values correct as of 03/02/2020

 

The tax treatment depends on your individual circumstances and may be subject to change in the future. The tax rules mentioned here are accurate for the tax year 2019/ 2020.

Please remember the value of your investments can go down as well as up, and you could get back less than invested.

 

 

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