Very confused about isas

J24uk1

If my salary is already taxed, and I decide to pay a percentage of it into an Isa every month after I've been paid, how is that money tax free I've already paid income tax on it? What's the point of putting it in an Isa?

eskbanker

You're conflating two different types of taxation - as you say, you pay PAYE income tax on your salary but that is irrelevant when it comes to what you do with your net income after that.

If you subsequently generate earnings from interest (on savings) or capital gains and dividends (from investments), then you'll be taxed on these secondary income streams (subject to various allowances), unless you use ISAs to shield these from those taxes.

So, basically forget about PAYE income tax and just consider ISAs from a starting point of having a pot of (already taxed) money - you can either put it into ISAs and not pay further tax on it, or use taxable savings or investment products instead.

Note however that the annual personal savings allowance of £1,000 for basic rate taxpayers means that most savers won't pay tax on savings interest anyway, regardless of whether it's within or outside of an ISA....

le_loup

J24uk1 wrote: »

how is that money tax free I've already paid income tax on it? What's the point of putting it in an Isa?

It is the INTEREST you get that is tax free.
If it's a stocks and shares ISA, it's the dividends and capital gains that are tax free.

Money_Help

Yes unfortunately the earnings you pay Income Tax on through PAYE can also be taxed again depending on how you save it. If it's outside of a tax wrapper (like an ISA or pension) then the interest or dividends you earn can be taxed.

Your money can be taxed multiple times throughout your life, think VAT and Inheritance Tax as well!

In the scenario described this is where saving into a pension is different. The tax you paid via your PAYE could effectively be reclaimed by the pension provider and used to top up your pension contribution. Pensions grow tax free like an ISA but there can be tax at the point you make a withdrawal. It will depend on you situation at the time.

Lokolo

Money_Help wrote: »

Yes unfortunately the earnings you pay Income Tax on through PAYE can also be taxed again depending on how you save it. If it's outside of a tax wrapper (like an ISA or pension) then the interest or dividends you earn can be taxed.

Being a bit pedantic, but wanting to make it clear, the money isn't taxed again, it is the earnings from that capital that is taxed.