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Why owning a Stocks and Shares ISA could be more important than ever!

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I’ve been an active Stocks and Shares ISA investor for years. For me, it’s a brilliant way to maximise my investment returns by stopping the taxman taking a slice of my profits. I can invest up to £20,000 a year this way too.

For me, the ISA appeal has jumped following changes to dividend and capital gains rules too. The tax burden of UK investors not using one of these tax wrappers could be about to balloon.

Tax changes

The treasury is getting tough in order to plug the black hole in Britain’s finances. So from next year, the dividend allowance will be cut from £2,000 this year to £1,000 from the 2023-2024 tax year. It will then fall further to £500 from April 2024 under plans announced in Thursday’s autumn statement.

This means that anyone earning dividends above these amounts will have to pay tax on the rest, depending on their total income.

UK share investors also face higher capital gains tax (CGT) contributions as the annual exempt amount falls. The current level of £12,300 will fall to £6,000 next year, and then to £3,000 the following year.

As senior investor and markets analysts Susannah Streeter of Hargreaves Lansdown comments: “This rise is a stark reminder of the value of ISAs in protecting investors from having to consider CGT or dividend tax.”

Please note that tax treatment depends on the individual circumstances of each client and may be subject to change in future. The content in this article is provided for information purposes only. It is not intended to be, neither does it constitute, any form of tax advice. Readers are responsible for carrying out their own due diligence and for obtaining professional advice before making any investment decisions.

Inflation protection

Those tax changes make investing in a Stocks and Shares ISA even more appealing to me today. But it’s not the only reason I prefer using them to reach my investment goals. Buying shares in one of these products is also a better way of protecting my wealth in this period of high inflation.

Savings rates on cash accounts have improved rapidly during the past year. This follows aggressive Bank of England interest rate hikes to current levels of 3%. With rates tipped to hit peak at around 5% in 2023 the returns on savings products is likely to keep improving too.

But in the grand scheme of things, interest rates on products like Cash ISAs remain pretty poor. The best-paying no-notice Cash ISA on the market (from Skipton Building Society) currently offers an interest rate of 2.75%.

That is well below the 11.1% rate of CPI inflation that Britain recorded in October. In effect, any money sitting in a Cash ISA today is losing value at a spectacular rate.

Better returns with UK shares

Its true that many UK share investors also face making a negative return right now. The long-term average annual return tends to range 8-10%.

But this isn’t a million miles off the current rate of CPI inflation. And given that prices are rising at their fastest for 40 years, this isn’t a bad result at all, in my opinion.

What’s more, as a Stocks and Shares ISA investor, I have a chance to beat that 8-10% average. The London Stock Exchange is packed with thousands of shares that could provide market-beating returns. With a Cash ISA, I don’t have that opportunity. Right now, that 2.75% rate is as good as it gets.

The post Why owning a Stocks and Shares ISA could be more important than ever! appeared first on The Motley Fool UK.

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Royston Wild has no position in any of the shares mentioned. The Motley Fool UK has recommended Hargreaves Lansdown. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.