Britons could save thousands of pounds with ISA tax breaks

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A person can save up to £20,000 a year in ISAs and investing funds in the account is a good way to reduce a person’s tax liability, an expert has said. Sarah Coles, head of personal finance at Hargreaves Lansdown, said people could save more tax than they might think by using ISAs.

She explained: “Your ISA could save you more tax than you think. We’re alive to some of the tax-saving potential of ISAs this year, because of the dramatic cuts to the dividend and capital gains tax allowances and the insidious creep of income tax.

“However, there are also some less well-known ways that the ISA can slash your tax bill. It can help parents facing the High Income Child Benefit tax charge, high earners wrestling with the loss of their personal allowance and employees cashing in on a workplace share scheme.

“And while the more obvious tax savings run into billions of pounds, the lesser-known tricks can help those who have crossed the most punitive thresholds.”

Ms Coles spoke about three lesser-known tax breaks a person may want to consider when looking at ISAs.

The High Income Child Benefit tax charge

This tax charge affects Child Benefit claimants when one parent in their household has taxable income of £50,000 a year or more.

The claimant will be required to pay back one percent of their payment for every £100 over the limit, meaning they will have to pay back the full amount when the parent’s taxable income reaches £60,000.

A person can reduce their taxable income by moving their savings into an ISA and taking part of their income from this, reducing how much of the tax charge they will have to pay.

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Child Benefit claimants currently get £21.80 a week for their eldest or only child and £14.45 for each of any additional children.

Payments for Child Benefit are increasing by 10.1 percent in April, along with many other benefits, including Universal Credit and Pension Credit.

With the uprating, the rate for the eldest or only child will go up to £24 a week while payments for each additional child will increase to £15.90.

Claimants usually get the money every four weeks on Mondays or Tuesdays while those on benefits such as Universal Credit may be able to get the funds paid weekly.

Those earning £100,000 and who want to preserve their personal allowance

ISA income is tax free but also has the bonus of not counting towards a person’s means test for their personal allowance.

The personal allowance is how much a person can earn without paying income tax, with the standard allowance at £12,570 a year.

This means those who earn above this amount will only pay tax on their earnings above the threshold.

However, the personal allowance is gradually eroded for those who earn taxable income of £100,000 or more.

For each £2 above the threshold, an individual’s personal allowance reduces by £1, and is removed entirely when their income reaches £125,140.

Ms Coles said: “By moving income-generating savings and investments into an ISA, high earners can enjoy a double tax break: keeping more of their personal allowance, which lowers their overall income tax bill, plus any income or gains within the ISA are tax-free too.”

A person can check how much income tax they are due to pay this financial year using a checker tool on the Government website.

Tax on gains from Sharesave schemes

Sharesave schemes have a specific rule that allows a person to avoid paying capital gains tax on the increase in value of their shares. This also applies to Share Incentive Plans.

If the shares are transferred into an ISA within 90 days of the scheme maturing, there will be no capital gains tax to pay on them.

This is particularly important as the threshold for capital gains tax is reducing from £12,300 a year to £6,000 a year this April, and is being halved again next April to £3,000.

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