A Stocks and Shares ISA can provide investors with a way to grow their wealth while shielding the returns from tax. For those considering investing in the FTSE 100, the tax advantages of this account can save a significant amount of money every year.
The FTSE 100 comprises the largest companies in the UK, delivering average annual returns of around 6.3% since it began. While returns vary year to year, this figure serves as a useful benchmark for estimating potential growth.
Suppose an investor places £20,000 into a fund that mirrors FTSE 100 performance – such as the iShares Core FTSE 100 ETF (LSE: ISF) – and leaves it untouched for 20 years. With average annual returns of 6.3%, the investment could grow to around £67,766 over two decades.
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The cost of not using an ISA
The above example assumes the investment’s held within an ISA, meaning all dividends and capital gains are exempt from tax. Therefore, the investor retains the full compounded return without deductions.
If the same investment was held outside an ISA, any gains would be subject to tax. The average UK capital gains tax rate is currently around 18%, and while this rate varies, it serves as a conservative estimate of potential tax on investment income.
Applying an 18% tax rate annually to the 6.3% return reduces the effective growth rate to roughly 5.39% a year. Over 20 years, this lower compounding rate would yield an investment value of just £55,016. That’s a substantial difference of £12,750, effectively representing the amount saved in tax by using a Stocks and Shares ISA.
| Scenario | Final Value | Tax Paid |
| With ISA (tax-free) | £67,766 | £0 |
| Without ISA (18% CGT) | £55,016 | £12,750 |
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.
Why this matters
Over time, taxes on dividends and capital gains can eat into returns, particularly for higher-rate taxpayers. By taking full advantage of the annual ISA allowance – currently £20,000 – investors can legally avoid these charges and maximise their long-term returns.
The iShares Core FTSE 100 is worth considering for ISA investors looking for broad exposure to blue-chip UK companies. It closely tracks the Footsie index, offering a competitive yield with relatively low fees.
With holdings spanning sectors such as energy, banking, consumer goods and healthcare, it provides a well-diversified foundation for long-term portfolios. The fund distributes dividends quarterly and currently offers a decent yield of 3.7%, making it an attractive choice for income-focused investors.
However, many FTSE 100 companies earn substantial revenue overseas. As a result, exchange rate fluctuations from GBP to USD or euro can impact company earnings and, by extension, the ETF’s returns.
Its low total expense ratio of 0.2% ensures minimal cost on returns, which is particularly beneficial when compounding gains over extended periods within an ISA.
Maximising growth
A Stocks and Shares ISA is one of the most tax-efficient investment tools available in the UK. And by simply sheltering a £20,000 investment from tax over 20 years, an investor could retain more than £12,000 that would otherwise be lost to HMRC.
So for those committed to long-term wealth building, an ISA’s worth considering for the powerful advantages it provides.
