Famed economist John Maynard Keynes once remarked, “The avoidance of taxes is the only intellectual pursuit that carries any reward”. Lord Keynes would know, because he managed Cambridge University’s endowment for 25 years. All of us must pay taxes, but no laws force us to tip the tax collector by paying more than is due. And that’s where ISAs come in handy.
ISAs? I see!
What are ISAs? They are Individual Savings Accounts: tax-free vehicles wrapped around financial assets including cash, bonds, and stocks and shares. Each tax year, British adults get a new tax-free ISA allowance.
ISAs arrived in April 1999, replacing Personal Equity Plans (PEPs) and Tax-Exempt Special Savings Accounts (TESSAs) as the UK’s leading tax shelter.
This tax year started on Monday, 6 April and runs to 5 April 2027. This year’s allowance for Stocks & Shares ISA is £20,000, also the limit for 2026/27 Cash ISAs. But the latter drops to £12,000 from 2027/28 onwards.
ISAs are the #1 tool for British savers and investors to avoid tax — along with pensions, that is. All income and capital gains (profits from selling assets) are free of additional taxes inside ISAs. That’s why 15m Brits open up an ISA each year.
Some patient investors have amassed portfolios worth millions inside ISAs, safe from HMRC’s grasp. Therefore, if you and yours don’t have any ISAs, then you may pay tax unnecessarily. And nobody wants that, right?
I love income ISAs
Generally, the more people earn, the more tax they pay (except for the super-rich, who use complicated loopholes to avoid tax). For example, employees earning £100,000+ a year must pay a punitive tax rate of 62% on some of their earnings. About one in 25 (4% of workers) fall into this tax trap, which I regard as obviously unfair.
My wife and I make efforts to (legally) minimise our tax bills. Hence, I’m a big fan of putting high-yielding dividend shares inside ISAs. By doing this, the high passive income they generate goes untaxed. Also, we can reinvest it to buy yet more shares, increasing our future shareholdings. To me, this is a win-win deal.
For example, we hold M&G (LSE: MNG) shares inside an ISA. We bought stock in this FTSE 100 investment manager in summer 2023 for its bumper dividends. At the current share price of 295.8p, M&G has a market value of £7.1bn, while its shares offer a market-beating cash yield of 6.9% a year.
Though this payout beats top saving rates of around 4.5% a year, dividends are risky. Future payouts are not guaranteed, so they can be cut or cancelled with no notice. This happened often during the 2020/21 Covid-19 crisis. In addition, most London-listed shares don’t pay dividends. Some companies are loss-making, while others reinvest their profits into future growth.
That said, M&G has a solid dividend history, with its payout rising steadily from 18.3p a share for 2021 to 20.5p for 2025. Moreover, the group — founded in 1931 — has billions of pounds of spare capital on its balance sheet to support future payments to shareholders.
M&G shares are up 63.3% over one year and 35.4% over five. But when financial markets next crash, I expect M&G’s revenues, earnings, and cash flow to suffer. But those are the risks of investing in ISAs!
