ISA tax breaks: These five 'lesser-known' tips can save you 'more than you think'

There are some less well-known ways that an ISA can slash one’s tax bill.

With the cost of living crisis still stretching finances, families need every investment to work as hard as possible for them.

Reviewing one’s mix of Cash, and Stocks and Shares ISAs ahead of tax year-end could make sense for one’s short-and long-term plans.

Making tax-smart decisions by tax year-end can make a real difference to the pension pot one can look forward to.

These lesser-known tricks can be a lifeline for those who have been dragged into paying the most punitive rates of tax, thanks to frozen thresholds.

Sarah Coles, head of personal finance at Hargreaves Lansdown said: “Your ISA could save you more tax than you think. You’d need to be living under a rock to have missed the fact that ISAs can save you tax, but while the some of their tax-saving brilliance is widely understood, there are also some less well-known ways that an ISA can slash your tax bill.

“It won’t just protect you from the dividend and capital gains tax allowances and the insidious creep of income tax. It’s also a handy way to slash the high-income child benefit charge, tax on a workplace share scheme, inheritance tax and a chunk of your income taxed at 60 percent”

Lesser known ISA tax breaks:

An ISA can protect against the high-income child benefit charge

The high-income child benefit charge is triggered when one parent in a household that’s claiming child benefit has taxable income of £50,000 or more. The tax charge is one percent of the child benefit for every £100 of income over £50,000 – with all benefit lost when a parent’s taxable income reaches £60,000.

The £50,000 income threshold includes things like taxable interest from savings, as well as salaries and bonuses. If someone earns between £50,000 and £60,000, by moving any savings into an ISA, parents can lower their taxable income from savings to reduce the charge – or avoid it altogether.

The other way to sidestep this charge is with a pension contribution – which cuts the amount of their income that’s counted when the charge is calculated.

The £50,000 income threshold includes things like taxable interest from savings, as well as salaries and bonuses. If someone earns between £50,000 and £60,000, by moving any savings into an ISA, parents can lower their taxable income from savings to reduce the charge – or avoid it altogether.

The other way to sidestep this charge is with a pension contribution – which cuts the amount of their income that’s counted when the charge is calculated.

Those earning £100,000 and over can save thousands by preserving their personal allowance

The rules mean that for every £2 in taxable income over £100,000, their personal allowance reduces by £1, and is completely extinguished by the time that income reaches £125,140.

This includes taxable income from things like savings and dividends. By moving them into an ISA, the income becomes tax-free, so doesn’t count towards this £100,000 limit. This saving is on top of the fact you’re not paying tax on this income too.

Ms Coles explained that if someone made £101,000 in taxable income, and £1,000 of it was in taxable dividend income, they’d pay £337.50 in tax on those dividends (dividends are taxed at 33.75 percent for higher rate taxpayers).

They would also lose £500 of their personal allowance, so at 40 percent that’s an extra £200 of tax. By moving those dividend-producing assets into an ISA, you could save £537.50 in tax in a single year.

You can use an ISA to protect against tax on gains from Sharesave schemes

There’s a specific rule to save people capital gains tax on shares from a Sharesave scheme or Share Incentive Plan (SIP). As long as they transfer the shares into an ISA within 90 days of the scheme maturing, there won’t be any CGT to pay on them. People can transfer up to £20,000 of shares each year.

AIM investments in an ISA are potentially exempt from inheritance tax after three years

If someone were to allocate some of their ISA allowance to qualifying investments on the Alternative Investment Market, and hold them for at least three years, then when they pass away, there will be no inheritance tax to pay on these investments – regardless of who they leave them to. “It’s an incredibly attractive proposition,” she said, however, it’s not going to be right for everyone.

Ns Coles added: “Not all shares on this market qualify, and those that do will be smaller and newer companies, which are high risk investments, so should only be considered as a small part of a large and diverse portfolio, and only then if they suit your circumstances.”

Britons can pass an extra ISA allowance to their spouse or civil partner after their death.

Anything one leaves to a spouse or civil partner after death is tax-free, but if their savings or investments are in an ISA, there’s an extra benefit. When they die, their ISA becomes a ‘continuing account of a deceased investor’ or a ‘continuing ISA’ for short.

No more money can be paid into it at this point, but while their estate goes through probate, if it rises in value, this growth will be tax free.

Ms Coles explained that once probate is completed, if it is being passed to their spouse, they will get an additional ISA allowance – known as an additional permitted subscription.

This is equal to the value of cash or investments passed on, or the value of the ISA on the date of death – whichever is higher – so they can wrap everything back up in an ISA without using up their annual allowance.

She concluded that while it’s not a tax break as such, people can also give yourself a break of another kind by using ISAs. If thy save and invest through an ISA they never have to include these assets on a tax return, giving themselves a real break from the admin headache of calculating and reporting dividends and gains every year.