The Chancellor, Rishi Sunak, announced at the Budget that personal tax allowances and bandings would be frozen for the next five years.
Tax erodes a person’s wealth and the effect of freezing the various allowances compounds this issue further. Given the allowances freeze and the 2020/21 tax year end approaching in a few weeks, tax wrappers are more important than ever.
The most obvious example of a tax wrapper is the humble Individual Savings Account (ISA), where you can contribute up to £20,000 a year. Income and gains generated within the ISA are not taxable, and withdrawals are also tax free, although there can be penalties for withdrawing early from a Lifetime ISA. If you don’t use your ISA allowance in one year, it’s lost – there’s no carry back or carry forward so it’s important to set a reminder every year.
Generous parents can also contribute up to £9,000 per child to a Junior ISA up to the age of 16. In theory, a family of four could save up to £58,000 across their respective ISA allowances in a year.
As an example, someone aged 25 and contributing the maximum amount to their ISA (including the Lifetime ISA which offers a £1,000 tax-free bonus from the Government) can build £210,000 of savings in a tax-free environment in ten years. Using a conservative rate of return of 3% per annum, someone would have a fund worth £240,741 by age of 35. The same investment made outside an ISA would be worth £215,523; a difference of over £25,000 (assuming the individual pays Income Tax on the investment return at the additional rate of Income Tax of 45%).
The results can be very attractive for parents wanting to make future provision for their children. If a parent contributes the maximum amounts to a Junior ISA and then an ISA for their new born child, the fund would be worth almost £400,000 by the age of 18 – if the child continues to contribute the maximum amount to their ISA (including the Lifetime ISA), the fund would be worth £697,000 by the age of 30 (assuming a rate of return of 3%). If the same investments were made outside the ISA, the investment would be worth £568,000 (assuming the same investment return is assessed at 45%).
ISAs have been around for over 20 years but could now present the most valuable form of defence and attack against the Government’s latest tax grab.
Would you like to know more?
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