One of the easiest ways to reduce your tax burden and grow your wealth legally is to save money in a tax free vehicle, such as an individual savings account (ISA).
ISAs are very easy to open and manage, and in the past few years, a number of new investments, from a gold and precious metals mining investment to peer to peer landing, have joined the list of options to invest with zero tax.
Classic ISAs were so far only for cash or stock and shares. You could decided to either open a normal savings account and designate it as an ISA to receive your interest tax free, or invest in the markets, and have no tax liability on capital gains.
The best part about ISAs is that as long as you don’t touch the money, your savings continue to grow tax free. And that makes a lot of impact. The same way a half percent difference in interest rate on a mortgage can cost you thousands of pounds over the 25 or 30 years of the loan, not paying tax on your ISA money equals to receiving a higher rate of return, which will compound over the years and help you build a solid financial future.
With the new tax year that just started on April 6th, you can save up to £20,000 into your ISA in the next 12 months. If you have savings, you can put the full amount into your ISA right now, or you can fund it during the year. One piece of advice though, only put the money you can afford to leave there for a few years, and not your short term savings.
Because if you were to invest £2,000, then withdraw that amount in six months, your ISA allowance would be reduced to £18,000 for the year. You cannot fund it up to £20,000 any more.
Since you can either put cash, stock and shares or alternative investments into your ISA, what makes the most sense? With interest rates so low at the moment when it comes to savings account, the best way to maximise returns is to put stocks, shares and innovative finance vehicles into your ISA.
Say you invest £10,000 in a cash ISA and get 1% a year. At the end of the year, you will have £100 in interest. If you are in the 20% tax bracket, you will save £20 in taxes.
If you invest in stocks and shares, and the market grows 10% that year, you will have £1,000 in interest, and a £200 tax saving. Compounded over several years or even decades, it makes a world of a difference.
But small amounts are better than nothing, and if you do not want your money to be tied for ages and risk any market swings, pick the cash ISA and keep your savings there. Even if you withdraw and replenish, £20,000 leaves you quite a bit of freedom to enjoy the tax break.
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