Do You Declare ISA Interest On Your Tax Return?
If you are wondering whether or not you are required to declare your ISA interest income as part of your tax return to HMRC, you will find the answer to your question in the following blog post. In addition to this, we will also explore the amount of tax on interest income that can be saved by investing in an ISA, the types of investments included in a tax-free ISA, and evaluate the ideal kind of ISA investment for a tax-free interest income.
Do You Declare ISA Interest On Your Tax Return?
No, you don’t have to declare the interest you earn on your ISA (Individual Savings Account) as long as your ISA contribution is equal to or less than £20,000 per person, per year. This rule applies to ISAs falling within any of the following classifications:
- Cash ISA
- Stocks and Shares ISA
- Innovative ISA
- Junior ISA
- Lifetime ISA
This tax-free allowance of £20,000 can either be placed in one of the ISAs mentioned above or it may be divided among two or more ISAs. However, you cannot invest your tax-free allowance in more than one type of ISA.
This means that, for your ISA interest to remain tax-free, it is essential that your contribution of £20,000 is split across varied ISAs such as cash, stocks and shares and junior ISAs. You cannot use this allowance for investment in two cash ISAs or two stocks and shares ISAs.
If your ISA contribution amounts to over and above this tax-free limit of £20,000, it will be subject to taxation; whether you’ve invested in one type of an ISA or spread your contribution across different ISAs.
The same rule applies in case of withdrawals from your ISAs; as any amount withdrawn from any type of ISA remains tax-free as long as your ISA contribution remains £20,000. However, in the case of withdrawals, you may face certain limits in the case of the type of ISA that you’ve chosen for your savings.
How Much Can You Save On Tax From ISA Interest Income?
The amount of tax that you can save from an ISA interest income depends on the following factors:
- your choice of ISA
- your alternative investment options
Your choice of ISA determines the amount of interest income that you will be able to gain from an investment; while certain types of ISAs yield greater interest returns, others may not.
In the case of alternative investments, if you choose a non-ISA investment option, you could be taxed as high as 28% on capital gains made from residential property and 20% on any other gains through investment income. This will depend on whether you are a basic, higher or additional rate taxpayer.
Based on these factors, if you invest in an ISA you can save on tax from interest income in the following ways:
- in the case of Interest Income Tax, you can save 20% of anything over the £1,000 allowance
- in the case of Dividend Tax, you can save 7.5% of anything over the £1,000 dividend allowance
- in the case of Capital Gains Tax, you can save 10% of anything over the £6,000 capital gain allowance
It should be noted that these amounts are subject to the 2023/2024 tax year and may change in the future.
Which Investments Are Included In ISAs For A Tax-Free Interest Income?
Based on the type of ISA you choose, below is a classification of the types of tax-free investments that are included under each ISA type:
|Type of ISA||Investment details|
|Cash ISA||savings held in bank and building society accountscertain National Savings and Investments products|
|Stocks & Shares ISA||shares held in companiesunit trusts and investment fundscorporate or government bonds|
|Lifetime ISA||cashstocks and shares|
|Innovative Finance ISA||peer-to-peer loans (personal loans extended towards other people or businesses without using a bank)crowdfunding debentures (investments made in a business by buying its debt)|
Which Is The Best Type Of ISA For A Tax-Free Interest Income?
While it may be riskier in returns than a Cash ISA when it comes to tax-free interest income, Shares and Stocks ISA generates higher returns for the saver and proves to be an ideal form of investment for interest income.
The reason for this is that a Shares and Stocks ISA allows savers to benefit from compound interest. This means that when the investment is left in the ISA over a period of time, interest earnings can be added to the original contribution amount which can generate a higher amount of interest income in years to come.
The interest income from a Shares and Stocks ISA is tax-free; whether it is in the case of Income Tax returns, Dividend Tax or Capital Gains Tax.
The above discussion helps to conclude that as long as your ISA contribution remains under the £20,000 tax-free threshold, you don’t have to declare investment income from an ISA while filing your tax returns. However, to benefit from maximum tax-free interest income, you may have to choose your ISA type considering the risk of returns involved.