The Biz Whizz

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Basics | 26th July 2018

Tax-free Income – What does it mean?

Paying tax is fundamental to ensuring everyone in the UK has the chance to live a good life. The money you pay in taxes goes towards paying government workers, supporting the NHS, the education of our youth, upkeeping infrastructure, and social support services. All of these things are necessary to keep the UK population happy and healthy, but once you’ve paid your share, why pay extra?

 

How do you pay income tax?

Your income tax is calculated according to how much you earn. You pay tax on:

  • Money you earn from employment
  • Profits from self-employment
  • Some state benefits
  • Most pensions
  • Rental Income
  • Benefits from your job
  • Income from a trust
  • Income from interest

 

Paying tax on savings interest

Prior to 2016, taxpayers had tax automatically taken from the interest they earned at a basic rate of 20%. But, in April 2016, the government introduced a new personal savings allowance. This means you can make up to £1000 in interest without having to pay tax. Higher rate tax-payers have an allowance of £500, but anyone who earns more than £150,000 a year doesn’t benefit from a personal savings allowance. Any interest above your allowance will be taxed. Also, anyone with earnings of less than £16,000 won’t pay tax on their savings.

 

Why pay more? Get a tax-free savings ISA

With ISA accounts you can save tax-free. This means you can earn interest on your savings up to £20,000 and pay zero income tax on your profits. That’s a much bigger allowance than you would get with any standard savings account. You can keep the extra money which would have lined the pockets of government workers and use it to get further to your goals. Paying income tax is a fair part of being a member of society, but paying extra on your savings is an unnecessary way to lose money.

 

Capital Gains Tax (CGT)

With an ISA, you are also exempt from paying capital gains tax. Capital gains tax becomes payable when you sell assets and make a profit. These assets include:

  • Businesses
  • A second property
  • Heirlooms
  • Shares

If you have a stocks and shares ISA, any profits you make from selling your stocks and shares is tax exempt up to your £20,000 limit.

These are two of the many benefits of an individual savings account (ISA). ISAs are better than regular savings accounts in almost every case depending on your individual needs.

 

If you are struggling to choose which ISA is best for you, our easy-to-use comparison tool will show you the best ISAs to help you start building your future. 

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