NISA tax Query

Crazi

Hi... trying to understand the tax implications of NISA in a specific scenario.

Fictional Scenario: I quit my job so have no other income except for:

1) £200,000 invested in a cash nisa @ 10% p/a so annual interest is £20k (so this is completely tax free)

2) £100,000 invested in a shares based nisa @ 10% p/a so annual interest is £10k (possible 10% tax implications)

Current personal income tax allowance is £11k per annum.

Question: Does the £20k tax free income in point 1 above count towards your annual tax free allowance even though the actual £20k is tax free?

Because if it does then the interest made in point 2 above becomes taxable at 10%?

If not then the interest made in point 2 above would then also be tax free as below the £11k allowance?

Hope this makes sense :-)

bowlhead99

The whole point of a NISA (or just call it ISA) is that any income or gains within it are entirely tax free. HMRC do not monitor, or enquire, about anything that happens inside your ISA. They only care that you don't contribute new money into ISA wrappers in excess of the annual ISA subscription allowance which is 15k from one April to the next.

So if you earn interest or dividends inside an ISA it can just sit inside the ISA and help earn you even more interest or dividends in future, or you can take it out and spend it, but either way HMRC do not care what income has been earned inside the ISA because they can't see it and nobody (not the ISA provider, not you) is required to tell them about it.

In the shares based ISA there is no tax to pay no matter what tax band you are in. The '10% tax credit on dividend income' is entirely notional anyway. If you are a non tax payer or low rate tax payer you have nothing to pay but you do consider the gross dividends earned outside tax wrappers as part of your total income for the year, offset by a credit. But if you have earned the dividends inside a tax wrapper such as an ISA or pension, there's nothing more to pay and nothing to put on any returns because HMRC do not want to hear about income you received inside a tax wrapper.

westy22

All ISAs (whether cash ISAs, NISAs or S&S ISAs) are of no interest whatsoever to HMRC. They are invisible to HMRC and you do not need to even declare them. You can take out interest, leave interest to accrue or draw out capital or growth entirely as you wish with no tax implications at all.

In the (very unlikely) scenario you outline above, HMRC would consider that you have no taxable income even though you might be drawing £30k per year from your ISA investments. Your annual personal allowance remains intact and you could earn up to that allowance before becoming liable to any tax.

westy22

Bowlhead is a much faster typist than me:)

Gram_Parsons

I just want in on these ISAs!

Archi_Bald

Probably worth adding that it is by no means a quick thing to get £200K into a cash ISA. If you have been maxing your cash ISA contributions each year since 1999, you can just about have deposited £85K to date. With interest added over the years, the balance might be around £100K by now. That still leaves you with about 6 years needed to achieve a £200K balance, assuming the annual allowance remains at £15K, and is being used to top up the cash ISA.

Whilst you are using the max allowance for the cash ISA, you couldn't also contribute to an investment ISA. So the only way to build up the value of the investment ISA would be not to put money into the cash ISA, or to split the allowance between the two. Either way, it will be years to get to £100K.

Aside from that, 10% AER interest on a cash ISA hasn't happened in a long time, and is not about to happen any time soon, if ever. Investment ISAs do not pay interest. An annual growth rate of 10% might be achievable with very high risk investments.

Moreover, if you quit your job, you won't get any employer contribution to your pension any longer.

Crazi

Thanks bowlhead and westy... that's what I wanted to hear :-)

Archi - figures/scenario are fictional just to help explain the query.