Always Take a Tax Break

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The mathematics of investing are harsh. When you make a profit you pay tax, but when you lose money there is no refund from yesteryear.

So when you invest or trade you are in a silent partnership with the government which takes no risk at all. Wouldn’t it be lovely to be in on that kind of deal?

Sadly, you can’t be in on a no lose game but you can invest without paying tax on your profits which is halfway towards that goal.

You don’t have to be rich to do it.

How?

By using what is called an ISA.

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The government has created an investment account called an ISA. ISA stands for Individual Savings Account. All profits kept in an ISA are tax free. Tax on profits is a huge drain and it can keep you poor.

So imagine you buy a share and make a profit and you are a 40% tax payer. If you have already used up your capital gains tax breaks, you will have to hand over 40%, nearly half of your profits, in tax. If that share was in an ISA you would keep all your profits. With an ISA profits are completely tax free.

Everyone has £11,000 in capital allowances so what is the point of an ISA? The answer is after a few years of investing, £11,000 in profits is easily achievable. If you never reach that level then no harm is done by keeping your money in an ISA.

You don’t have to be a millionaire to make £11,000 in a year. The stock market doesn’t boom every year, but it can go up 50% occasionally and that can throw even a modest investor over their tax free limit. Imagine you bought some shares in a company that flew and because it had shot up you wanted to sell it. That one fluke could easily put you in the tax bracket, without having a big portfolio (I use ADVFN’s free portfolio tools to keep track of my investments).

£11,000 might seem a lot but if you invest properly for a few years it will become a low hurdle.

People underestimate the power of investing to build up wealth.

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Firstly, investing is saving. This might sound trite, but most people do not save much because piling money up is less fun than spending it. Investing on the other hand is an excellent pastime and gives a saver a reason to forgo the joys of spending. Investing is a good way to save and the results can be excellent over time.

Imagine saving £1,000 a year when you are between 20 and 30, then saving £5,000 a year between 30 and 40 and then saving the full ISA limit of £15,240 each year until you are 65. It doesn’t seem too much to ask.

At a 7% profit per year, the rate the market has earned historically, by the age of 65 you have over £1.6 million in your ISA account and you’ve been saving tax on profits since your 40s. If you did it outside of an ISA you’d have a little less than a million, so the difference is over £600,000, roughly half of your potential profits in a tax protected ISA.

If you start putting yearly profits of 10% into the calculations, the numbers start to look silly. You end up with over £3 million on retirement. Meanwhile outside of an ISA you might end up losing £1.5 million in tax.

If you hit a Warren Buffett style 25% you would end up with £200 million.

That is the magic of investing; that’s why rich people do it. Small figures can grow very large with tax free growth.

While we all can’t be Warren Buffett, anyone with a little discipline, a little patience and a positive outlook can use an ISA to invest in their future and end up with a significant pension pot when they are ready to retire.

When the government offers you a tax break, you should take it.

Get yourself started today by opening a free ADVFN account. It will give you access to live prices on all the stocks and shares you can put into an ISA. It’s the first step to take, it’s free and it will give you a great base for your investment future.

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