If you’re a wealthy individual in the UK, turning to an individual savings account (ISA) as part of a strategic approach to smart tax planning may not be the first thing that springs to mind.
Most high-net-worth individuals (HNWI) are looking for ways to reduce their tax burden and improve their wealth management, and ISAs could play a part in that process.
But, what are the tax benefits of using ISAs, and what can a HNWI expect from making a such an investment?
How to Fight Off the UK’s ‘Tax Attacks’
There are a number of ways ISAs can help reduce a HNW individual’s tax burden, such as offering no tax on investment profits or capital gains, tax-free interest on cash savings, and the flexibility to withdraw savings without losing the tax-free allowance.
Sarah Coles, Head of Personal Finance, at financial services company Hargreaves Lansdown, said: “Tax attacks have been coming at us from every angle this year, and as they get more aggressive, ISAs are working even harder,” with the amount saved in tax rising by a fifth in the current tax year.
She added that we were “assailed by cuts in the capital gains tax (CGT) and dividend tax allowances; bombarded by higher capital gains tax rates on stocks and shares; and the taxman has seen positive stock market growth and robust interest rates as an excuse to come after us for more. But – the ISA has proven a trusty shield from it all.”
The current government has raised the capital gains tax rate on stocks and shares, so basic rate taxpayers pay 18%, and higher rate taxpayers go to 24%. “This boosted tax savings this year but will do so even more in the next tax year when the rules apply for the full 12 months,” said Coles.
“When we invest through an ISA [it’s] a very sensible way to protect investments from these hikes in CGT. Inside an ISA, you don’t pay a penny of dividend tax either – which can be a lifeline for those relying on investments for income,” said Coles.
“The rise in the amount of tax being saved owes a great deal to efforts by successive governments to dip into our pockets for investment gains,” added Coles. “The previous government slashed the capital gains tax annual allowance from £12,300 to £6,000, and then to £3,000 last year.
It also cut the dividend allowance from £2,000 to £500 over the same period, and this means “more investors with money outside tax wrappers are being pushed over these limits and paying more tax, and this automatically increases the amount of tax saved by holding investments within an ISA.”
The Autumn Budget 2024 also reduced the CGT annual exemption, increasing taxable gains for higher earners.
Why Is The Use of ISAs Rising?
Recent Bank of England figures revealed that around 12.4 million Adult ISA accounts were subscribed to in 2022 to 2023, up from 11.8 million in 2021 to 2022.
The number of cash ISAs subscribed to increased by 722,000, and the share of accounts subscribed to in cash has risen to 63.2%, a 2.5% growth from 2021 to 2022.
Close to £67 billion was placed into UK-based adult ISAs (such as Cash, Stocks and Shares, Lifetime and Innovative Finance) from 2021 to 2022, according to UK government data from June 2023.
For Rob Morgan, Chief Analyst at Charles Stanley, a UK-based investment management company, ISAs are “absolutely” a good way for HNWI to save money, with a couple able to put away “£40,000 each tax year between them, so over ten years as much as £400,000 can be contributed.”
“ISAs have always been a mainstay of financial planning and a first port of call for saving tax,” added Morgan, but with “pensions set to lose some of their usefulness for intergenerational tax planning (as they will count towards the value of an estate for inheritance tax purposes from next year), the emphasis does shift a little to ISAs for older, wealthier individuals.”
“A so-called ‘flexible’ ISA can also be really useful to HNWs,” said Morgan, “as it gives the saver the freedom to withdraw money and, crucially, put it back again without affecting the annual allowance – in effect you can provide a short bridging loan to yourself to cover a large purchase.”
“As for a Stocks & Shares ISA, you don’t have to pay income tax or capital on the returns, so they can be a valuable place to store investments as you don’t have to worry about tax consequences.”
How ISAs Have Become One of the Most Effective Tools for HNWI
Moreover, the investment choice within a Stocks and Shares ISA is “vast” added Morgan, with “something to suit all levels of knowledge and risk.”
He continued that there are “numerous examples of ISA millionaires with seven figure sums built up free from income and capital gains tax.”
However, those who want to become an ISA millionaire need to be dedicated to the cause – maxing out the annual £20,000 allowance; having a portfolio that’s well-diversified; and staying committed to reinvesting your income.
John Williams, a financial advisor at Sterling and Law, writing online in late 2024, argued that for wealthy individuals, ISAs are one of the most effective tools to help build a tax efficient UK investment portfolio, and “an incredibly effective way to reduce tax.”
ISAs remain a “solid way for higher rate taxpayers to invest tax efficiently and to mitigate the growing burden of taxation on higher earners,” he added.
“Using an ISA as part of your tax efficient investing strategy is essential for high earners and anyone looking to grow their wealth while minimising taxes,” said Williams.
Should There Be a £100,000 Lifetime Limit on ISA Contributions?
The Taxing Wealth Report 2024, from political campaigner tax expert Professor Richard Murphy, highlighted around thirty relatively simple changes to existing UK taxes, arguing that about £90 billion in new tax revenue could be raised a year, entirely from the financially well off.
Murphy suggested a £100,000 lifetime limit on ISA contributions, with ISA tax relief withdrawn from those who have more than £200,000 in ISA accounts.
But for Ian Batterbee, Practice Principal at Sterling & Law Group, a UK-based financial advice provider, “if you earn a million pounds a year, putting money into any sort of ISA, especially when you’re limited to £20,000 a year, isn’t really going to change your life.”
But, he added that ISAs are a good way to keep your savings safe, which then frees us people to make riskier investments.
Author: Ed Pearcey
The editorial team at #DisruptionBanking has taken all precautions to ensure that no persons or organisations have been adversely affected or offered any sort of financial advice in this article. This article is most definitely not financial advice.
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