There are a number of factors that influence the way HMRC calculate your tax liability, including:

• Income: The primary source of tax liability for most Brits is their income, which includes wages, salaries, tips, and any other earnings. In the UK, income tax rates vary depending on the amount earned. For example, those who earn between £12,571 and £50,270 will be taxed at the basic rate of 20%, those who earn between £50,271 and £125,140 at the higher rate of 40%, and those who earn over £125,140 at the additional rate of 45%.
• Business profits: For businesses, tax liability is based on their net profits after deducting eligible business expenses from their total revenue. Corporate tax rates and allowances differ from the income tax rates mentioned above.
• Capital gains: When you sell an asset (this could be real estate, stocks, or other investments), the difference between the price you purchased it for and the price you sold it for is considered a capital gain, which is likely to be liable to tax.
• Deductions: Deductions from your income, such as money towards a pension scheme or a charitable donation, reduce your taxable income. 

In the UK, there are many types of ISAs to help you save and invest, including Cash ISAs, Stocks and Shares ISAs, Lifetime ISAs, Innovative Finance ISAs, and Junior ISAs (for those under the age of 18). By contributing to one or more ISAs, you can lower your tax liability in some way.

For example, Stocks and Shares ISAs lower your tax liability because you won't be subject to paying capital gains tax on the return of your investments, and you won't pay Income Tax on the interest or dividends earned in Cash ISAs.

With the plethora of ISA options available, it's easy to use ISAs to lower your tax liabilities, especially if you can afford to put the maximum annual allowance into your ISA. This article will help you understand your annual allowances for different types of ISAs.

Understanding Your Annual ISA Allowance

For the 2024/2025 tax year, everybody in the UK has an annual ISA allowance of £20,000, which they can contribute to one ISA or split across Cash ISAs, Stocks and Shares ISAs, Innovative Finance ISAs, and Lifetime ISAs. However, you can only put £4,000 of that annual allowance into a Lifetime ISA each tax year - which runs from the 6th of April to the 5th of April the following year.

For example, you can contribute the full allowance of £20,000 to a Cash ISA, or you can contribute £4,000 to a Lifetime ISA, £8,000 to a Cash ISA, and £8,000 to a Stocks and Shares ISA. 

The current ISA allowance of £20,000 has been the same since 2017 and will remain the same until at least April 2030. This announcement came in the 2024 Autumn Budget, despite the fact that if the tax-free allowance had risen in line with inflation each year, the annual allowance would now be roughly £26,082.

The Junior ISA works slightly differently, as it has its own annual allowance of £9,000. You can contribute to a Junior ISA on behalf of a child under 18 without reducing your annual allowance for adult ISAs. The Junior ISA annual allowance increased from £4,368 to £9,000 in April 2020, but if the tax-free allowance had continued to rise with inflation, it would be £11,277 this tax year.

Save Smarter, Not Harder

We understand that not everyone has enough money to contribute the maximum allowance of £20,000 a year to adult ISAs and £9,000 a year to Junior ISAs. However, contributing any money, no matter how small, can significantly lower your tax liabilities, as all funds in an ISA are tax-free. 

When considering your tax liability, remember that the HMRC doesn't just account for the current tax year, it also factors in previous years where you have owed tax.

In the UK, individuals, businesses, and other taxable entities are legally responsible for paying taxes on their income, business profits, or capital gains.