Why invest through an ISA

" Why invest through an Isa

Investing in an Isa is one of the few opportunities we have for making money tax-free.

Each tax year investors get an Isa allowance - this currently £20,000.

The reason for investing in an Isa is its tax-friendly nature, with the added bonus that you don’t need to worry about a tax return or declaring gains.

Any gains within an Isa are free from capital gains tax. Everyone has a CGT allowance of £12,300 per year (2020 to 2021) and many may feel they are unlikely to ever make more than this in profit each year from selling their assets.

However, those who invest consistently over time may one day be surprised at how much those investments are worth and holding them in a tax-free wrapper makes sense.

Income from investments is also treated in a tax-friendly way in an Isa. The tax-free dividend allowance has been cut from £5,000 to £2,000 and beyond that rates of 7.5 per cent at basic rate and 32.5 per cent for higher rate taxpayers and 38.1 per cent for additional rate taxpayers apply.

However, if you hold shares, investment trusts or a fund in an Isa there is no tax to pay on dividend income.

While you may be nowhere near using all of the £2,000 dividend allowance now, you might get there one day, so putting your investments in a tax-free wrapper is a sound tactic.

Isa investing also means you don’t have to fill in dividend income on a self-assessment form and removes the headache of tax returns for any capital gains.

It used to be that investing in an Isa was not always worthwhile, as charges were higher. In most cases charges are now exactly the same as for normal investing, so using an investing Isa makes sense."

There’s also talk of the government reducing the CGT allowances in the future because too many people are “abusing it” by realising exactly the allowance worth of gains each year. Having your investments in an ISA will give you greater flexibility in the future.