Please help me with ISAs and understanding tax - I am self employed
02 June 2021
Question by Nuno
I am self employed, so my taxes are paid at the end of the year. Let’s say I earn £40,000 a year and I am taxed at 20%, and I decide to open a cash ISA and fill it up to the maximum tax free allowance which is £20,000, and so I have £20k in a cash ISA and the remaining 20k profit in regular business account. Does this mean I pay 0 tax on the £20k inside the cash ISA, meaning my taxable income is reduced from 40 to 20k? Or am I only tax free based on the interest earnings from the savings in the ISA?
Answered by Helena Wardle
Understanding the different reliefs can be confusing and I am happy to help clarify this.
To answer the first question, unfortunately, your taxable income won’t be reduced from £40,000 to £20,000, as any contribution to an ISA receives tax relief on the growth and income within the investment- you can’t offset the investment amount against any of your existing tax liability as described in your question. The tax relief you get in an ISA means that any returns you make within your ISA is tax-free. So if the money within your ISA generates interest, and income or grows in value these returns are free of tax whereas outside of an ISA they may be taxable. So, you are correct in saying any interest earned in the Cash ISA would be tax-free, as all types of ISAs benefit from tax-free growth.
I hope this helps