Q

How are ISAs taxed?

A

The simple answer: they're not.

The simple answer: ISAs aren’t taxed! And that’s what makes them so great. As usual, the truth is more complicated. ISA investment gains are not taxed, however the money deposited into an ISA will not help reduce your current year tax bill the way a deposit into a pension would.

For instance, a person who earns £75,000 in a year and contributes £20,000 to her ISA is still taxed on £75,000 by HMRC, but if she deposited that same £20,000 to her pension, she’d only be taxed on £55,000 of income. So owing to those immediate tax breaks, the pension would be the clear winner, no? Not necessarily. Because unlike a pension, which is taxed upon withdrawal, the money within the JISA will never again be subject to income tax, so any and all JISA gains are tax-free. We’re pro not paying taxes whenever possible and legal, however the pension versus ISA question is a complicated topic, and best debated elsewhere.

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