5 Lesser-Known ISA Tax Breaks for UK Freelancers and High Earners

While many know about the basic tax benefits of Individual Savings Accounts (ISAs), several lesser-known ISA tax breaks can be especially valuable for UK freelancers and high earners, according to a report by Hargreaves Lansdown. This article explores these hidden gems and explains how they can save you money.

1. Reduce High-Income Child Benefit Charge: Freelancers with taxable income exceeding £50,000 might face this charge. Sheltering savings in an ISA lowers your taxable income, potentially avoiding or reducing the charge.

For example, 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 1% of the child benefit for every £100 of income over £50,000 – with all benefits 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 earnings, salaries and bonuses, according to the report. The firm’s personal finance expert Sarah Coles says if you earn 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 your 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, your 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.

2. Preserve Your Personal Allowance: Earning over £100,000 gradually reduces your personal allowance. By moving taxable income like dividends to an ISA, you protect this allowance, saving you tax.

3. Shield Sharesave Scheme Gains: Transfer shares from a Sharesave scheme to an ISA within 90 days of maturity to avoid capital gains tax on up to £20,000 annually.

4. Potentially Avoid Inheritance Tax on AIM Investments: Hold qualifying Alternative Investment Market (AIM) investments in an ISA for three years or more before death to make them inheritance tax-free. Remember, AIM investments are high-risk.

5. Pass on Extra ISA Allowance to Your Spouse: After your death, your spouse or civil partner can inherit an additional ISA allowance equal to the value of your ISA, allowing them to continue saving tax-free.

Bonus: Simplify Your Tax Life: ISAs eliminate the need to report dividends and gains on your tax return, saving you time and hassle. But it is also advised you confirm with an accountant if you are self-employed or have hybrid earnings from self-employment and a salaried job.

3 Well-Known ISA Tax Breaks:

• No Capital Gains Tax (CGT) on Investments: Avoid CGT on stocks and shares held in an ISA, even when rebalancing your portfolio.
• No Income Tax on Interest: Basic-rate taxpayers save 20% tax on savings interest within an ISA, while higher and additional-rate taxpayers save 40% and 45% respectively.
• No Tax on Dividends: Enjoy tax-free dividends on investments held within an ISA, regardless of your tax bracket. According to Hargreaves Landownes’s Sarah Coles, while everyone has a dividend allowance of £1,000 this year, this is cut to £500 on April 6. “Investors pay tax on any dividends they receive above this amount. Basic-rate taxpayers pay 8.75% tax, higher-rate payers pay 33.75% and additional-rate taxpayers 39.35%. Sheltering investments in an ISA means dividends will be totally tax-free,” she says.

Remember, consulting a financial advisor is crucial before making investment decisions, especially with high-risk options like AIM investments. By understanding these tax breaks, UK freelancers and high earners can make the most of their ISAs and save money effectively.