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.
ISA 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.
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.
ISA 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 the set limit. 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.