The humble Isa can help protect against the Chancellor's anticipated tax grabs, a senior tax adviser has claimed.
Nimesh Shah, chief executive of tax and advisory firm Blick Rothenberg, said the combination of the freeze on personal allowances, together with next week's Tax Day and the end of the tax year, highlighted the importance of making the most out of Isas.
He said: “ 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.
"They could leave you more than £25,000 better off.
Commenting on various changes made by Chancellor Rishi Sunak that is likely to hit all taxpayers hard over the next few years, Shah said: "Sunak announced at the Budget that personal tax allowances and bandings would be frozen for the next 5 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.”
He said: "The most obvious example of a tax wrapper is the humble Isa, where you can contribute up to £20,000 a year."
Income and capital gains generated within the Isa wrapper are not taxable, and withdrawals are also tax free - although there can be a 25 per cent penalty for withdrawing early from a Lifetime Isa.
Shah said: "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."
For example:
- An individual, aged 25, contributes the maximum to their Isa allowances, including the Lisa, which qualifies for a £1,000 tax-free bonus from the government.
- Without adjusting for inflation or interest, this could build up to £210,000 worth of savings, in a tax-free environment, in 10 years.
- Using a rate of 3 per cent growth a year, by 35 this individual could have a fund worth £240,741.
- Outside of an Isa, this would be worth £215,523 thanks to tax on the capital gains.
- This accounts for a difference of £25,000, assuming the individual pays the additional income tax rate of 45 per cent on the investment return.
Shah added: “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 Jisa 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 Lisa), the fund would be worth £697,000 by the age of 30 (assuming a rate of return of 3 per cent).
"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 per cent).”
simoney.kyriakou@ft.com
