Tax free income stream through Individual Savings Account
We have all heard and are aware of individual Savings Accounts but not many of us understand the benefits and tax rewards associated with ISAs. The aim of this article is to explain how ISAs could generate tax free income stream for you.
You could invest up to £15,000 into ISAs (From 1st July 2014) and the proceeds from which will be free from personal taxation (There is a limit of £5,940 that you could invest in cash, out of £15,000). The best time to invest into ISAs is the beginning of tax year, which is 6th of April 2014 (The limit on 6th of April is £11,880).
If you use an ISA to invest £11,000 for 10 years, it will create pot of £110,000 plus accumulated interested which is generating tax free income which could be more beneficial than pension, in some cases, as the funds could be taken out anytime as there is no requirement to reach the retirement age.
It is always easier to explain with an example so here goes.
You have invested £8000 into stocks which gave you a gain of £12,000 after four years. You want to cash it in and have already used your capital gains annual exemption somewhere else.
If you invested using your ISA, you will be pleased to know that you will not pay any tax on the £12,000 gain.
However if you made an investment without using the ISA then the gain of £12,000 would have attracted a capital gains tax liability. If you are a high rate tax payer than the capital gains tax liability would have been £3360.
Comparison using a gain of £12,000:
Investment using ISA - £0 Tax.
Investment without using your ISA - £3360 Tax.
Congratulations, you have just saved £3360 of your children’s inheritance.
Please note that this does not constitute as an advice and professional advice must be sought before taking any decision.
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