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2 reasons I’m starting a Stocks & Shares ISA in 2023

White note with '2023' written on, pinned to a yellow background

A Stocks & Shares ISA can be a great medium for me to grow my spare cash over several years through buying equities. With a new financial year dawning upon us, here are a couple of reasons why I’ll be starting an account in 2023.

1. Exemptions from incoming tax increases

One of the main perks of a Stocks & Shares ISA is its tax benefits. Mainly, it helps to reduce or even eliminate capital gains tax liabilities. It can also provide tax relief on investment income such as dividends. Even more so when I’m planning to invest in FTSE 100 shares with high dividend yields.

Investors are currently allowed to invest up to £20,000 a year, tax free. This allows me to make greater use of my returned capital and potentially earn more from my investments over the long term. The current tax-free allowance outside of an ISA for capital gains and dividends is £12,300 and £2,000, respectively.

Both capital gains and dividend allowances are set to decline massively through to FY24. As such, there’s even more of a reason for me to start a Stocks & Shares ISA. This is especially the case as a long-term investor practicing Foolish principles.

Tax-free allowance FY22 FY23 FY24
Capital gains £12,300 £6,000 £3,000
Dividends £2,000 £1,000 £500
Data source:

2. A banging year ahead

If not for an ISA, I could be losing quite a bit of my gains if I were to sell my shares, especially when the stock market is expected to rally this year, and beyond that.

Broker AJ Bell is forecasting the FTSE 100 to hit an all-time high this year. In fact, Britain’s leading index has already hit a six-month high this week. Analysts are predicting that the index’s biggest sectors will outperform in 2023. Consequently, pre-tax profits and dividends are anticipated to grow substantially.

Sector Pre-tax profit growth Dividend growth
Oil & Gas 24% 23%
Financials 23% 18%
Mining 16% 16%
Consumer staples 12% 12%
Industrials 7% 8%
Data source: AJ Bell

Therefore, if I were to invest £20,000 into stocks and shares in these sectors, I may have to pay a hefty amount of taxes from the increment in dividends without an ISA. After all, dividend yields in miners and energy companies are already relatively high.

FTSE 100 Average Dividend Yield
Data source: Dividend Data

That being said, most of my current positions are in US growth and tech stocks. Despite analysts not being so bullish on US equities this year, I’m still continuing to dollar-cost-average on names such as Alphabet and Pinterest, which have huge upside potential. Thus, an eventual surge in their share prices could see me paying a hefty fee if I do decide to sell my shares at higher valuations one day.

So, in order to avoid paying Uncle Sam his pay cheque, I’ll be aiming to start a Stocks & Shares ISA for my investments before the new financial year begins in April.

The post 2 reasons I’m starting a Stocks & Shares ISA in 2023 appeared first on The Motley Fool UK.

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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.

Suzanne Frey, an executive at Alphabet, is a member of The Motley Fool’s board of directors. John Choong has positions in Alphabet and Pinterest. The Motley Fool UK has recommended Alphabet and Pinterest. 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.