Given the allowances freeze and the 2020–2021 tax year-end approaching in a few weeks, tax wrappers like ISA’s are more important than ever and could leave you over £25,000 better off, said leading tax and advisory firm Blick Rothenberg.
Nimesh Shah, CEO at the firm said: ‘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 2020–2021 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 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.’
Nimesh added: ‘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 10 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%).’
He concluded: ‘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 newborn 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.’