ISAs - tax free or not?
Discussion
I'm now in a position to draw an income from my investments, part of which are in ISAs.
I always thought that income from ISAs was tax-free. However I'm told that in fact what I get are dividends, not income, and so they are taxed at source at 10%, and the tax-free bit only happens if you sell them at a profit.
And then on R4 this morning I distinctly heard a financial person say that income from ISAs is tax free. So why can't I have that, and pay no tax on it?
I always thought that income from ISAs was tax-free. However I'm told that in fact what I get are dividends, not income, and so they are taxed at source at 10%, and the tax-free bit only happens if you sell them at a profit.
And then on R4 this morning I distinctly heard a financial person say that income from ISAs is tax free. So why can't I have that, and pay no tax on it?
A quick 'google' produces an article on some tin-pot looking website implying the same thing... However, HMRC beg to differ http://www.hmrc.gov.uk/isa/faqs.htm#10, you don't have to tell HMRC about anything you have going on inside an ISA with regard to CGT or income.
I've also checked some dividend payments in my online account and they've paid the full amount quoted by the company with no deductions.
I've also checked some dividend payments in my online account and they've paid the full amount quoted by the company with no deductions.
the dividends that the fund receives from the stocks they hold are indeed taxed at 10%. this came about after Labour removed this tax incentive from both pension funds and ISA funds.
the tax-free tag is that any monies you withdraw are free of CGT is the value of the holdings have increased and there are no additional requirements in terms of tax returns etc.
the completely tax free ISA is the cash variety.
you are probably just selling units in the fund to take an 'income' rather than the nautral income generated within the fund itself from the aforementioned dividends.
the tax-free tag is that any monies you withdraw are free of CGT is the value of the holdings have increased and there are no additional requirements in terms of tax returns etc.
the completely tax free ISA is the cash variety.
you are probably just selling units in the fund to take an 'income' rather than the nautral income generated within the fund itself from the aforementioned dividends.
It is a bit confusing.
But ... the additional bit is that dividends on equities are paid to the ISA with some tax (10%) already having been deducted. So, once the dividend has been received by the ISA there is no more tax to pay but there has already been some tax paid. This 10% dividend tax used to be reclaimable within an ISA.
HMRC said:
Q. What are the tax benefits of an ISA?
A. You pay no tax on any of the income you receive from your ISA savings and investments. This includes dividends, interest and bonuses.
You pay no tax on capital gains arising on your ISA investments (losses on ISA investments cannot be allowed for Capital Gains Tax purposes against capital gains outside your ISA).
The insurer does not have to pay tax on income and capital gains on investments used to back your ISA life insurance policies. You do not have to pay any tax when the policy pays out.
You can take your money out at any time without losing tax relief.
You do not have to declare income and capital gains from ISA savings and investments or even tell your tax office that you have an ISA.
So it sounds as if no tax is payable.A. You pay no tax on any of the income you receive from your ISA savings and investments. This includes dividends, interest and bonuses.
You pay no tax on capital gains arising on your ISA investments (losses on ISA investments cannot be allowed for Capital Gains Tax purposes against capital gains outside your ISA).
The insurer does not have to pay tax on income and capital gains on investments used to back your ISA life insurance policies. You do not have to pay any tax when the policy pays out.
You can take your money out at any time without losing tax relief.
You do not have to declare income and capital gains from ISA savings and investments or even tell your tax office that you have an ISA.
But ... the additional bit is that dividends on equities are paid to the ISA with some tax (10%) already having been deducted. So, once the dividend has been received by the ISA there is no more tax to pay but there has already been some tax paid. This 10% dividend tax used to be reclaimable within an ISA.
moneysavingexpert said:
Placing investments inside an ISA wrapper provides three tax advantages. First, any profits made from share price increases aren't eligible for capital gains tax, second, it enables all the tax on bonds to be reclaimed, and third, it means dividend income's taxed at 10% - a significant saving for higher and additional rate taxpayers.
HTHOK, I take it back. I was wrong, 10% is taken at source on dividends.
Edited to add... So let me get this straight, when companies quote like this:
http://www.ihgplc.com/index.asp?pageid=236&tab...
or this
http://www.ihgplc.com/index.asp?pageid=236&tab...
They have already included the 10% deduction?
Edited to add... So let me get this straight, when companies quote like this:
http://www.ihgplc.com/index.asp?pageid=236&tab...
or this
http://www.ihgplc.com/index.asp?pageid=236&tab...
They have already included the 10% deduction?
Edited by greggers on Monday 5th August 14:29
Thanks for the various answers. I have asked the portfolio manager for clarification; it will be interesting to see if he comes up with the same info.
I'm not a higher rate taxpayer; in fact as I now earn very little and largely live on dividends, income tax should be a thing of the past. I think?
Just can't see what all the fuss about ISAs is. A bit like pensions really. Everybody says 'Oh but you must have one!' - and when you analyse it, you wonder why.
I'm not a higher rate taxpayer; in fact as I now earn very little and largely live on dividends, income tax should be a thing of the past. I think?
Just can't see what all the fuss about ISAs is. A bit like pensions really. Everybody says 'Oh but you must have one!' - and when you analyse it, you wonder why.
Gordon certainly muddied things up a lot when it came to dividends.
Firstly, when a dividend is paid out, it is DEEMED to have been paid to the shareholder minus a 10% tax deduction. However, this 10% tax is actually a "phantom" tax. It is not actually deducted and it is not actually paid to anybody.
If the dividend is being paid in the normal way (i.e not part of an ISA set up), then the taxpayer accounts for the dividend as if he received the dividend GROSS but gets a credit for the pretend 10% tax that hasn't actually been paid.
Madness, I hear you say. And you would be partly right.
However, the Gross Dividend helps to boost the taxpayer's income levels to a point where he/she approaches the Higher Rate Tax threshold a bit sooner than they otherwise would.
If the taxpayer IS a Higher Rate Taxpayer, then they will be asked to pay Higher Rate Tax on that part of the dividend that falls above the Higher Rate threshold.
Of course, if the dividend is part of an ISA package, then it won't get taxed at the Higher Rate.
It won't get taxed at the lower rate because it never would have been taxed at the lower rate anyway.
Firstly, when a dividend is paid out, it is DEEMED to have been paid to the shareholder minus a 10% tax deduction. However, this 10% tax is actually a "phantom" tax. It is not actually deducted and it is not actually paid to anybody.
If the dividend is being paid in the normal way (i.e not part of an ISA set up), then the taxpayer accounts for the dividend as if he received the dividend GROSS but gets a credit for the pretend 10% tax that hasn't actually been paid.
Madness, I hear you say. And you would be partly right.
However, the Gross Dividend helps to boost the taxpayer's income levels to a point where he/she approaches the Higher Rate Tax threshold a bit sooner than they otherwise would.
If the taxpayer IS a Higher Rate Taxpayer, then they will be asked to pay Higher Rate Tax on that part of the dividend that falls above the Higher Rate threshold.
Of course, if the dividend is part of an ISA package, then it won't get taxed at the Higher Rate.
It won't get taxed at the lower rate because it never would have been taxed at the lower rate anyway.
Isnt this to do with the fact that in order to pay a dividend the company would have to pay from current or previous profits which then are subject to corporation tax.
Its this fact that the end person gets the credit for. Basically a recognition that tax has been paid on the disbursement already in the form of corporation tax.
Or am I talking botox?
Its this fact that the end person gets the credit for. Basically a recognition that tax has been paid on the disbursement already in the form of corporation tax.
Or am I talking botox?
It is.
But the OLD dividend payment system made the company deduct real 20% tax from the dividend payment. The net dividend was then paid to the shareholder and the tax was physically paid to HMRC by the company.
When the company prepared its Corporation Tax return, it was allowed offset the tax it had paid on its dividend payments against any Corporation Tax due (it was known as Advance Corporation Tax or ACT).
The shareholder was also given credit for the tax deducted at source and only had to pay additional tax on the dividend if they were a higher rate taxapyer.
The modern 10% tax credit system works differently.
But the OLD dividend payment system made the company deduct real 20% tax from the dividend payment. The net dividend was then paid to the shareholder and the tax was physically paid to HMRC by the company.
When the company prepared its Corporation Tax return, it was allowed offset the tax it had paid on its dividend payments against any Corporation Tax due (it was known as Advance Corporation Tax or ACT).
The shareholder was also given credit for the tax deducted at source and only had to pay additional tax on the dividend if they were a higher rate taxapyer.
The modern 10% tax credit system works differently.
Well I'm completely confused now. Tax deemed to be paid = not taxed 
Maybe I could 'deem' to pay VAT...
Anyway, this is the official answer, which makes no mention of 'deeming'.
Is all he says correct or can he be smarter? What should my ISAs be invested in to maximise what litle use they are - corporate bonds?
Maybe I should just let him do whatever he does for his 0.5% while I go and do something else!
Maybe I could 'deem' to pay VAT...
Anyway, this is the official answer, which makes no mention of 'deeming'.
portfolio bloke said:
‘Income’ from an ISA may comprise dividends and/or interest.
ALL UK dividend income suffers a tax deduction (at source) of 10%. Strictly therefore, dividend income within an ISA is tax-efficient rather than tax-free insofar as there is no further liability which there would be for a higher-rate taxpayer who would pay another 22.5% tax on dividend income from shares held outside an ISA wrapper.
Interest within an ISA from, say, Corporate Bonds IS paid gross with no further tax implications…………………………but a 5% gross dividend where you would ultimately retain 4.5% is a better return for you than, say, 4.4% gross interest despite the fact HMR&C is having a little bit. In other words, net yield is taken into account as part of our stock selection process.
It seems ISAs are of limited value to anyone paying standard rate or no income tax.ALL UK dividend income suffers a tax deduction (at source) of 10%. Strictly therefore, dividend income within an ISA is tax-efficient rather than tax-free insofar as there is no further liability which there would be for a higher-rate taxpayer who would pay another 22.5% tax on dividend income from shares held outside an ISA wrapper.
Interest within an ISA from, say, Corporate Bonds IS paid gross with no further tax implications…………………………but a 5% gross dividend where you would ultimately retain 4.5% is a better return for you than, say, 4.4% gross interest despite the fact HMR&C is having a little bit. In other words, net yield is taken into account as part of our stock selection process.
Is all he says correct or can he be smarter? What should my ISAs be invested in to maximise what litle use they are - corporate bonds?
Maybe I should just let him do whatever he does for his 0.5% while I go and do something else!
Simpo Two said:
It seems ISAs are of limited value to anyone paying standard rate or no income tax.
That's right.I confess I get confused by the precise details of deemed tax vs actual tax on dividends. But it is correct that an ISA has little benefit on dividend income for a basic rate tax payer. You do still get a CGT benefit, although you'd need some fairly big investments for that to be a practical benefit.
Simpo Two said:
It seems ISAs are of limited value to anyone paying standard rate or no income tax.
Is all he says correct or can he be smarter? What should my ISAs be invested in to maximise what litle use they are - corporate bonds?
Maybe I should just let him do whatever he does for his 0.5% while I go and do something else!
The tax of 10% shown on a dividend voucher is not deducted by anyone nor is it paid to HMRC. It is a numerical exercise only. That is why it is referred to as a "deemed" deduction.Is all he says correct or can he be smarter? What should my ISAs be invested in to maximise what litle use they are - corporate bonds?
Maybe I should just let him do whatever he does for his 0.5% while I go and do something else!
I have to deal with this concept on almost a daily basis as I have to adjudge dividend values for my clients when it comes to them deciding how much they can afford to take from their companies and whether they want to pay any Higher Rate Income Tax on any dividends withdrawn.
Eric Mc said:
I have to adjudge dividend values for my clients when it comes to them deciding how much they can afford to take from their companies and whether they want to pay any Higher Rate Income Tax on any dividends withdrawn.
That would mean that dividends are also income...? So you pay an imaginary 10% on the dividends, then also another 40% if you take too much - which seems a most careless thing to do IMHO. What if you take dividends equating to a salary that would land in the at standard rate band... back to 20% income tax is it?I thought that if I was living on dividends there'd be no further tax to pay - but maybe not. In which case an ISA that gives me tax-free income is worth having after all. But I didn't think they paid income, but dividends. I seem to have gone round in a big circle back to where I started.
Dividends are part of income for the receiver. If the dividend is received within an ISA, then it isn't taxed (except for the 10% complication mentioned above). If received outside of an ISA, it isn't taxed further for a basic rate tax payer.
For a higher rate tax payer, there is additional income tax to pay - see here https://www.gov.uk/tax-on-dividends. But it still works out as a tax advantage compared with income as total tax on a dividend for a 40% tax payer would be 32.5%.
(EricMc will be along shortly to correct the detail ...
)
For a higher rate tax payer, there is additional income tax to pay - see here https://www.gov.uk/tax-on-dividends. But it still works out as a tax advantage compared with income as total tax on a dividend for a 40% tax payer would be 32.5%.
(EricMc will be along shortly to correct the detail ...
)CaptainSensib1e said:
Do you know if you are being charged anything to hold the investments in an ISA? Many brokers don't charge extra for the ISA (although some do). So while the ISA may not be offering you any benefit, it may not be costing you anything either.....
I think it's the same rate for everything, because the ISAs are part of a whole portfolio they are 'managing'.Gassing Station | Finance | Top of Page | What's New | My Stuff