One of the biggest reasons to invest in an ISA is to receive the many tax benefits these savings accounts offer. In fact, these investments are often referred to as a “tax free wrapper,” where you can place money to earn interest or returns without having to pay the tax man for any of your earnings. The benefits can be used on either cash or shares, which means you get to control the amount of money you can make tax-free. Tax advantages fall into two categories: capital gains tax and income tax benefits.

Income Tax Benefits

In most situations, any income you earn, through wages, interest or dividends, is subject to income tax. However, that is not the case with ISAs. All of the money you earn on these savings vehicles is completely tax free.

How do the savings add up? Consider the following numbers:

• The current basic rate of tax on savings interest is 20%. This means that if you earn $100 in interest for the year, $20 of that income would go directly to the taxman. With an ISA, that $20 stays in your pocket – all because you chose to open the most advantageous cash savings account for your needs. If you are in a higher tax bracket, the savings could be as much as double the mentioned figures.
• If you are a high rate taxpayer, you also get a tax break on stocks and shares ISAs. Most taxpayers in this category must pay out a 22.5% tax on dividends for equity investments. However, that amount is not assessed on shares ISAs, making these investment vehicles a good choice for high rate taxpayers particularly.

Income tax benefits are just part of the equation when you are considering an ISA, however. The other advantage to these accounts is the capital gains tax benefits you can enjoy.

Capital Gains Tax Benefits

Capital gains tax benefits specifically apply to stocks and shares ISAs. Most investment products are subject to a capital gains tax if the amount of earnings from your shares in a single year exceeds £10,100. This tax requirement is waived for investments in ISAs, making them definitely worthwhile for those who plan to sell or make a great deal from their investment vehicles in a given year.

The other advantage to stocks and shares ISAs is that the limit for contributions each year is as high as £7,200. This is double what is allowed in a cash ISA. However, keep in mind that if you put £3,600 into a cash ISA, you can only put the same amount into a shares ISA, since your total ISA contributions for any given year cannot exceed the £7,200 maximum.

ISAs were originally created more than a decade ago to encourage Brits to save and invest. To promote the use of ISAs, tax benefits were included with the program. If you want to save money and avoid paying your earnings to the taxman this year, consider opening an ISA with one of the many ISA providers located across the United Kingdom.