Britons are being reminded to take advantage of Isas before relief is scrapped or reformed as some Britons could be at risk of getting slapped with a 60 per cent tax charge, according to analysts.
Isas are savings accounts used by bank customers to avoid paying tax below a certain allowance, however reports suggest Chancellor Rachel Reeves is being lobbied by the City to overhaul the product's protections from the tax man.
Sarah Coles, the head of personal finance at Hargreaves Lansdown, explains: "Your Isa could save you more tax than you think. It can also protect you from taxes you didn't even know were lying in wait for you.
"So on top of the tax savings we know about from dividend tax and income tax to capital gains tax there are five other hidden taxes an Isa can defend you against," she added.
Despite these warnings, many Britons are unaware of their tax liability when it comes to savings interest and still end up losing their hard-earned cash to HM Revenue and Customs (HMRC).
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Savers could be hit with a 60 per cent tax charge, experts are warning
GETTYHere is a full list of the "hidden tax breaks" savers are being told to take advantage through ISA products, according to analysis from Hargreaves Lansdown:
- Making a profit through a Sharesave scheme from work could see employees hit with a tax charge but this could be avoided using a Isa
- Investing for a child in a bare trust could result capital gains tax (CGT) bill at 18 if they make significant gains, however this may be mitigated with Isa
- Inheritance tax (IHT) is not currently potentially payable on AIM Isas after two years
- High earning parents could save at least some of the high income child benefit charge by sheltering savings within an Isa
- Britons making over £100,000 may be able to use an Isa to protect themselves from 60 per cent tax and losing free childcare
Here is a full list of the taxes Isas are commonly known to protect savers from, as highlighted by Hargreaves Lansdown:
- There is no CGT levied on investments placed in an Isa, whereas a non-Isa savings account is charged at up to 24 per cent past the £3,000 allowance
- No income tax is paid on interest which saves basis-rate taxpayers a 20 per cent bill, and higher/additional-rate taxpayers 45 per cent
- Finally, there is no tax on dividend interest if investments are stored in an Isa
Coles broke down in detail how parents will be able to use Isas to avoid a 60 per cent tax bill from HMRC and also save money on childcare as a bonus.
The tax expert added: "The rules mean that for every £2 in taxable income over £100,000, your personal allowance reduces by £1, and is completely extinguished by the time that income reaches £125,140.
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Savers are at risk of losing money to HMRC
GETTY"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.
"If you made £101,000 in taxable income, and £1,000 of it was in taxable dividend income, you’d pay £337.50 in tax on those dividends (dividends are taxed at 33.75 per cent for higher rate taxpayers).
"You would also lose £500 of your personal allowance, so at 40 per cent 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."
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