Do I have to declare an ISA on my tax return?

An ISA or an Individual Savings Account is a particular type of account that allows you to save or invest a certain amount of money every year. Saving or investing in ISAs can offer some significant tax advantages.

When you’re self-employed, you need to complete a Self Assessment tax return every year. But do you have to declare an ISA on your tax return? 

How do ISAs work, and what are their benefits? Keep reading below to find out about:

• How ISAs work
• Different types of ISAs
• Benefits of ISAs

You can open one ISA per tax year and have multiple ISAs. You can invest up to £20000 per tax year combined into your ISAs. Companies can make tax free investments as well. Read our article on the annual investment allowance here.

You don’t have to declare ISAs on your Self Assessment tax return or pay tax on profits, income or capital gains on your savings on investments. Find out more about what tax small businesses and sole traders pay here.

If you live in the UK and are over 16 years old, you’re entitled to save a certain amount of money in an ISA every tax year. This is called your ‘ISA allowance’, and it’s £20,000 for the current tax year. The ISA allowance is different from the personal allowance for the self-employed.

Once your money is in an ISA, it can’t be taxed, regardless of how long you have it in there, and you can keep your money in an ISA for as long as you want.

1. Stocks & Shares ISAs

If you want to invest your ISA allowance in the stock markets, you can do so through Stocks & Shares ISAs. They can give you better long term returns than Cash ISAs. But the risk of losing your money is always there with any investment in the stock market.

2. Cash ISAs 

Cash ISAs give you a variable or fixed rate of interest, and it’s normally earned over a set period of time. You are guaranteed this income, which makes cash ISAs less risky than stocks and shares ISAs. But interest rates are usually lower and are currently at all-time lows.

3. Junior ISAs

You can open a Junior ISA for your child and invest the £9,000 Junior ISA allowance into it each year. They come with the same tax benefits as adult ISAs, and you can also transfer Child Trust Funds into a Junior ISA.

4. Lifetime ISAs

The Lifetime ISA was introduced in April 2017. It gives you a £4,000 annual allowance (which counts towards your overall £20,000 ISA allowance), with the Government adding a 25% bonus to anything you pay into the ISA up to age 50. 

You can only use the money to buy your first home or support your retirement once you reach age 60. You can withdraw your money whenever you want for other reasons, but you will have to pay a 25% charge on anything you take out.

5. Help-To-Buy ISAs

Help-to-Buy ISAs were opened on the 1st of December 2015 and closed on the 30th of November 2019. 

They are a type of ISA designed to help first-time buyers save up a deposit for their new home. The government would add a tax-free bonus of up to 25% to all money saved.

You would have to save between £1,600 and  £3,000 to receive the bonus. The maximum monthly deposit is £200 each calendar month. 

If you have a Help-to-Buy ISA, you can transfer those savings into a Lifetime ISA, or you can continue to save into both. But only the bonus from one of the ISAs can be used to buy a house. If you now transfer your Help-to-Buy ISA savings into a Lifetime ISA, they will count towards the £4,000 contribution limit.

There are several reasons why an ISA might be suitable for you. For example:

Opening an ISA can be an excellent place to start as an investor if you’re interested in stock markets and the potential returns you can get from investing.

They are adaptable to your needs and easy to use. You can choose your risk level and investment style. You can also keep an eye on how the money in your ISA is doing.

ISAs allow you to manage your money depending on your goals and circumstances. For example, if you have some additional cash, you can put it into the markets or add it to your stocks and shares ISA as a one-off payment or a regular contribution.

Unlike a pension, which has restrictions on withdrawals, you’re free to choose how much you invest and when with an ISA within its tax allowance. Likewise, you can invest for as long as you need.

Unfortunately, inflation can make the cash in our bank account lose its value. A stocks and shares ISA can be an excellent option to grow your savings and mitigate inflation. 

Investing in shares is never wholly risk-free, so make sure you are willing to take on the potential risks.

ISAs protect your money from capital gains and income tax because you don’t have to declare or pay tax on any money earned from ISAs.

If you leave the money invested in the ISA, the profits will be invested back into markets, making a big difference over time. You’ll potentially be making the most of the remarkable potential of compound returns. 

ISAs can serve a variety of purposes depending on your goals. For example, stocks and shares ISAs can help you begin investing in the market, but you can also use a Junior ISA (JISA) to put money aside for your children to give them a financial boost when they reach 18. 

You can also consider a Lifetime ISA (LISA), which helps you save money for your future or for your first home with a 25% government bonus (up to £1,000 a year) in addition to what you pay in.

Perhaps the most significant benefit of ISAs is that you don’t pay tax on the growth, returns or interest in your ISA. So if you have a cash ISA, all interest earned in the ISA is always effectively tax-free. 

If you have a stocks and shares ISA, you don’t pay tax on any dividends from shares, and you don’t pay capital gains tax on any profits made from the investments.

In addition, having an ISA should simplify your tax return. Most people don’t have to report the income and capital gains from their ISAs on their annual tax returns.

It’s worth noting that the tax rules for ISAs can change, but the government usually announces these changes well in advance before they take effect. Some of the tax benefits may depend on your unique circumstances.

Opening an  ISA can feel overwhelming on top of your complicated daily bookkeeping admin. Putting money aside is easier when your finances are well organised.

Thousands of business owners are using the Countingup app to save time on their financial admin and focus on growing their business. 

Countingup is the business current account and accounting software in one app. It automates time-consuming bookkeeping admin for self-employed people across the UK.

With automatic expense categorisation, receipt capture tools and cash flow insights, you can confidently keep on top of your business finances and save yourself hours of accounting admin, so you can focus on doing what you do best. Find out more here.