Some investors may have never bothered to use their ISA allowance. The current Capital Gains Tax allowance of £12,300 may have seemed generous enough to cover any gains, while a tax-free dividend amount of £2,000 may have covered most of the portfolio income. But, unfortunately, this relatively generous allowance is coming to an end, as the following table shows:


There is also the risk that these allowances never get raised in line with inflation, further reducing allowances via stealth taxation.

An investor that has filled their ISA every year for five years and generated some reasonable returns could easily have £150k in their ISA by now. But what happens to the ISA investor over the next 25 years versus an investor who had the same amount in a General Investment Account (GIA)?

Modelling the impact

To model this, I need to make a couple of assumptions: the investment returns, what proportion of those returns come from dividends, and how often an investor may turn over their portfolio. To start with, I assume the long-term market averages, which is approximately 9% nominal return, half of which comes in the form of dividends. For the Turnover Ratio, academics Barber and Odean found that the typical individual investor turns over 75% of their portfolio yearly. Of course, an investor turning over 75% of their portfolio annually may have much higher fees than an index tracker. However, since I am interested in the comparative performance here, I will ignore the impact of fees on performance since these will be similar for an ISA or a GIA.


Starting with the £150k on 1st January 2023, I assume that over the next year, the portfolio generates £6,750 of capital gains, of which 75% or £5,063 is realised, and £6,750 of dividends. Since this gain occurs in Tax Year 2023/24, there is no capital gains tax to pay. But £5,750 of the dividends are taxable. The net amount after taxes, I assume, is reinvested back into stocks, giving a portfolio value of for the basic Rate Taxpayer of £162,997 and £161,599 for the Higher Rate Taxpayer. This is compared to the ISA investor, who has kept all the gains and has a £163,500 portfolio after reinvesting their dividends. (Again, I am ignoring costs since this…

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