Yahoo Finance ISAs remain super stars of UK's tax saving options
Individual Savings Accounts (ISAs) will save Brits £3.7bn ($4.9bn) in income tax alone, new ONS data revealed.
The annual income tax saving on ISAs has risen 42% over the past five years, as the allowance increased, investments and savings grew and more money was accumulated over longer periods.
The objective of ISAs is to encourage individuals to save over time by removing the tax liability for savings income.
The cost of ISAs has increased across time, the ONS said. The limit was increased to £15,240 for the 2015 to 2016 tax year and £20,000 in 2017 to 2018.
Costs fell in 2020 to 2021 mainly due to reduced equity valuations in the wake of COVID-19, but are expected to continue to increase through time as greater wealth is built within ISAs.
In the 2021 to 2022 tax year, the maximum you can save in ISAs is £20,000.
“ISAs are set to save us a massive £3.7bn in income tax this tax year. And at a time when taxes are rising through the roof, every single penny of this makes a massive difference,” said Sarah Coles, senior personal finance analyst, Hargreaves Lansdown.
She said Brits are heading into a period of much higher taxes – where tax as a share of GDP is at its highest since the 1950s.
“The government is firmly in claw-back territory, using the gap between the height of the pandemic and the next election to attract as much cash as possible to pay back the unimaginable levels of borrowing required to get us through the crisis.”
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This makes tax breaks more valuable than ever, and Coles says Brits should take much advantage of their ISA and pension allowances as makes sense for them this tax year.
“It’s well worth considering what you can free up this side of the April deadline,” she said.
Stocks and shares ISAs also save capital gains tax (CGT) when sold, so anyone who has made £12,300 on their investments this tax year could save CGT too.
Previous figures showed that the average ISA portfolio was worth £28,530, "so there will be plenty of people grateful for the CGT saving".
For those saving into a lifetime ISA, there’s also the government bonus on top of the tax saving, so there’s even more to be gained from these schemes.
The ONS data also showed income tax relief on pension schemes is set to cost the Treasury £22.5bn this tax year, and National Insurance relief £19.7bn. Both are set to be lower than the previous tax year.
First-time-buyer relief on stamp duty is set to save Brits £430m this year. This was significantly lower in 2020/21 because of the stamp duty holiday that applied to all buyers. It wasn’t phased out until September 2021, so affected this year’s figures too.
The fact there’s no inheritance tax on transfers between spouses and civil partners is set to save Brits £3.8bn this year. The figure has risen during the pandemic partly as a result of rising house prices and growth in investments, and sadly also because more people died.
The most valuable tax relief is on food, which is set to save us £20.7bn this year. It has risen substantially since the onset of the pandemic, as Brits stayed in and spent more on food.
The fact that there’s no capital gains tax to pay on selling the home one live in "is the biggest chunk of tax relief of all," said Coles.
"As prices have risen, it’s increasingly valuable, and is on track to save us £30.2bn this tax year."
According to a survey commissioned by Hargreaves Lansdown, the five most hated taxes in the UK are inheritance tax (24%), income taxes (17%), VAT (15%), tax on savings and investments (15%) and sin taxes including sugar, alcohol and petrol (10%).
Watch: What is National Insurance and do I have to pay it?
