Living tax free from ISA income

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6th Feb '21 by facepalm

9 comments 643 reads

I've been pondering giving up the day job and becoming a full time trader. I appreciate its not a decision to be taken lightly and have given myself a year to 'prove' my ability to achieve gains over and above my current Net salary (NB I've been trading 'part time' for about twenty years, so have a fair bit of experience and not jumping into this cold).

My query is regarding tax - if I draw down a 'salary' from my isa - is it completely tax free? Does anyone on this forum have experience of this?

I should probably enlist the help of a tax advisor so any recommendations on that front would be greatly appreciated as well.

Many thanks

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Facepalm

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9 comments

john2

6th Feb '21

Yes, any money transferred from your ISA whether as dividends or sale proceeds is tax-free. You do not have to declare it on your tax return.

I have been living off the proceeds of my ISA, topped up by contributions from my SIPP, for 10 years now. I tend to pay myself an amount equal to my tax free allowance from my SIPP, all dividends from my ISA are paid directly into my bank account, if I need more money than that then I review the situation at the time.

facepalm

6th Feb '21

Thanks John - in respect of the SIPP, that is obviously taxable income - is there a tax free element or does any withdrawal attract tax?

Mike888

6th Feb '21

All drawings from an ISA are tax free. For a SIPP you can take 25% tax free, currently at age 55. You will pay income tax on further drawings from your SIPP after you have consumed your annual tax free allowance.

I suggest talking to an IFA, SIPP provider, or one of the other free sources of information regarding pensions, as once you start drawdown from a SIPP there are consequences that may prevent you making further contributions.

john2

6th Feb '21

Yes, income from a SIPP is taxable but most of us have a tax code which entitles us to draw £12,500 from a taxable source without having to pay tax on it.

john2

6th Feb '21

You are also entitled to withdraw a one-off tax-free lump sum of 25% of its value from your SIPP. I did this at age 55, and invested the proceeds in a high-interest account (remember those?). I used the money in that account to live off, and every year until it ran out I transferred the maximum annual amount into my ISA.

john2

6th Feb '21

There's one more thing to say about obtaining £12,500 tax-free from my SIPP. Every year, my SIPP platform deducts 20% from the £12,500 that I pay myself. I have to submit a form P55 to the Inland Revenue to reclaim that 20%. The form can be submitted on line, so it's a minor annoyance and the money is always paid to me very promptly.

rpannell

6th Feb '21

Assuming you have taxable income, either from current employment or from a SIPP/Pension, you could consider investing in a VCT to offset the income tax and have a future stream of tax free dividends. I have a number of VCTs that are paying a 20% tax free dividend, based on the original purchase price.

facepalm

6th Feb '21

brilliant, thanks for the top tips

pka

6th Feb '21

If you are considering putting some money into Venture Capital Trusts for their tax advantages, you should bear in mind that they have a reputation of being risky:

https://www.bestinvest.co.uk/research/vcts/what-are-the-risks-of-vcts

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Living tax free from ISA income

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Facepalm

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