Most common tax misconceptions about the ISA

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Most common tax misconceptions about the ISA

As more and more people invest their money, ISAs are becoming a more tax-friendly investment option due to frozen allowances and high interest rates. Shawbrook Bank has experienced a remarkable 73 percent rise in new cash ISA accounts from January to May 2023 compared to the same period last year. While these accounts remain a popular saving option amongst Britons, there are a few misconceptions about how they work. But despite their popularity and having existed for more than two decades, there is clearly much confusion about how they work, said Rob Morgan, chief investment analyst at wealth management firm Charles Stanley.

Charles Stanley, a financial analyst at Boston University, said nearly three-quarters don't know what a flexible ISA is, with more than a quarter having never heard of one. With a flexible ISA, up to 11 percent think it allows people to increase their ISA contribution, while 20 percent think it allows them to swap their cash ISA to a stocks and shares ISA or vice versa. With the ability to transfer their ISA to someone else, 9 percent believe it allows them to transfer their ISA to someone else. Express Money, based on research gathered by the wealth management firm on the most common ISA misconceptions, spoke to experts to find out the rules. People can only have one ISA at a time, a 19 percent of survey respondents believe.

Rowan Harding, financial Planner at Path Financial, said that people can have as many ISAs as they want and spread their £20,000 tax-free personal allowance across these. You have the flexibility to split your tax-free allowance across as many ISAs and ISA types as you wish. If you invest £10,000 in a Stocks and Shares ISA and the remaining £100,000 in a Cash ISA, you can make up for it. It's a useful tool for those who want to use their investment for different purposes and over varying periods of time. Up to 16 percent of savings savers are confused about the annual contribution rules of ISAs, most pertinently thinking they can use last year's allowance to save even more tax-free this year.

Some providers provide flexible ISAs that not only provide withdrawals but also enable savers to replace the money without losing any of their annual allowance. It's an excellent way to maximise your allowance, easily access your cash when you need it, and quickly replace the money back into the ISA before the end of the tax year. Up to 17 percent of savers say ISAs are the only tax-efficient savings option.

While ISAs are often the first source of call for investors seeking to save tax, pensions are'more tax efficient than ISAs' for many people, experts at Charles Stanley have said. s no tax on gains or income on investment in a pension, Mr. Stanley said. While there can be tax to pay when you take money out, and you have to wait until retirement age to do so, they tend to be highly advantageous for those investing for a comfortable retirement. The tax is on any interest earned within an ISA - nine percent of people believe interest earned within an ISA gets taxed. t taxable and there is no capital gain tax to pay on profits, he said.