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The handing over to Rachel Reeves of the keys to Dorneywood, the 21-bedroom Buckinghamshire mansion occupied by Deputy First Minister John Prescott during the last Labour government, is perhaps the strongest signal yet that the Treasury’s responsibility is outstripping that of Deputy First Minister Angela Rayner.
Reeves is set to make good on Sir Keir Starmer’s warning that those with the “broadest shoulders” will bear the brunt of tax rises in his first budget next month.
Left-leaning think tanks have been advising Reeves to raid pension savings and take a good chunk of our children’s inheritances. And experts say Individual Savings Accounts (ISAs) could also be in the Treasury’s crosshairs.
Chancellor Rachel Reeves is set to raise taxes in her first budget on 30 October
Here we reveal how the Chancellor could raid Isas and what you should do NOW to protect your savings.
Why might Isas be in Reeves’ sights?
ISAs allow you to save or invest up to £20,000 a year without having to pay a single penny of tax on the interest, returns or capital gains earned.
Offering such generous tax breaks is not cheap.
The Resolution Foundation estimates that tax relief offered through Isas will “cost” the Treasury a hefty £6.7bn in 2023-24 in taxes it could otherwise have raised, up from £4.9bn in 2022-23.
The increase is largely due to higher savings rates.
There is currently almost £750bn in cash and shares ISAs in the UK, and more than 22 million adults have part of their savings in tax-free accounts, according to government figures.
ISAS are available to everyone, regardless of their level of income and wealth. However, a small minority of people with significant wealth can take full advantage of the benefits and shield large sums from tax.
Labour may look at this cohort and wonder whether the state really needs to offer the current level of tax breaks to encourage them to save.
The signs that a government is interested in tax-free savings are ominous.
Labour earlier this month ruled out a plan that would have allowed savers to put another £5,000 into a UK ISA investing only in UK companies.
This was a conservative policy outlined before the elections were called.
“There were almost four million people with ISAs worth more than £50,000 in 2020/21,” says Sean McCann, certified financial planner at NFU Mutual.
‘The Government could choose to cap the amount people can have in an Isa or reduce the £20,000 annual allowance to reduce that cost.’
How could Isas be diluted?
Economists at the Resolution Foundation have called for a £100,000 limit to be set for individual savings accounts. Those who reach this limit will no longer be able to top up their individual accounts.
Another possibility is to reduce the annual limit from £20,000, and the Government could argue that this would only affect the richest savers. The Resolution Foundation says £20,000 is more than four times the average level of total savings (including current accounts and other savings products) per adult.
On average, adults have around £4,700 in cash savings, according to this measure.
Alternatively, the current limit of £20,000 could remain at the same level for years to come, with its value gradually eroded by inflation.
The limit has already been at £20,000 for seven years since 2017. If it had risen with inflation, it would now be above £25,000.
What are the chances of changes to Isas?
Ed Monk, associate director at Fidelity International, does not expect any radical changes to ISA rules next month.
ISAs are highly valued financial products and most households use them to increase their savings. Reducing their value would discourage saving.
However, experts suggest that further tax tweaks in the Budget could make ISAs even more attractive.
For example, if Chancellor of the Exchequer Rachel Reeves increases capital gains tax rates in the Budget, then being able to invest without attracting tax becomes more valuable.
“If the tax treatment of pensions were to change, this could also reduce the scope for individuals to save in a tax-advantaged way over the long term,” Monk adds.
“Changes in either area would only increase the importance of maximising Isa allowances, if possible.” They could also make Isas a more likely target in future budgets if their popularity were to increase.
ISA to shield budget changes
Money saved in ISA accounts is unlikely to be taxed retrospectively, so it makes sense to max out the accounts now.
You can save the £20,000 annual allowance into a Cash ISA, Stocks and Securities ISA or Innovative Finance ISA, or split the allowance across multiple accounts, which could include saving up to a maximum of £4,000 into a Lifetime ISA.
Saving in a Cash ISA means you don’t have to declare any interest you earn to HMRC as there is no tax to pay on that income.
Capital gains and dividend income earned in a stocks and shares ISA are not taxable and, again, do not need to be declared to the IRS.
The same rules apply to innovative finance ISAs, which allow you to invest your savings in a wider range of assets, including peer-to-peer lending, crowdfunding obligations (company debts) and alternative funds.
These investments are typically riskier, but with a higher potential for reward. The rules for individual lifetime savings plans are slightly different, although all income and gains are still tax-free.
You can open a Lifetime ISA if you are between 18 and 40 years old and you can deposit up to £4,000 a year until you are 50.
For every £1 you pay, the Government will add 25p as a top-up (or 25pc), meaning you could get up to £1,000 free each year.
You can only keep bonds if you use the money you save to buy your first home or to fund your retirement later in life.
Rosie Hooper, a certified financial planner at Quilter Cheviot, warns: ‘Your ISA allowance resets every tax year and it’s a case of ‘use it or lose it’ as it doesn’t carry over to the next tax year.
‘While not everyone will be able to save the full £20,000, it’s important not to overlook it as it offers a great opportunity to grow your money tax-free.’
Be smart about your ISAs and max them out now to help protect your money from Rachel Reeves’ changes, as cash saved in them is unlikely to be taxed retrospectively.
Become an expert in divisions
ISA rules changed on 6 April 2024, meaning you can now split your £20,000 ISA allowance between multiple cash and investment ISAs in the same tax year.
Ed Monk says: ‘This means that investors can spread their investments across different providers.
‘For example, if you want a stocks and securities ISA for long-term investments and a separate ISA for more regular transactions, you have this level of flexibility.’
But he cautions that it may be easier to keep track of your investments, and possibly cheaper, if you consolidate them into one.
Monk also suggests using the ‘Bed and Isa’ rules.
These allow you to sell investments in a taxable account and buy them back into an ISA, potentially shielding them from a capital gains tax increase in the Budget.
“This process is handled by your investment platform, so it’s worth setting aside time to organise a transfer,” he adds.
How changes to IHT could affect Isas
Any funds you have saved in an ISA will form part of your estate when you die and will therefore be subject to inheritance tax.
However, your beneficiaries may inherit an additional allowance so they can keep your savings tax-free in their own ISA. This is known as an Additional Allowable Subscription (APS) and is available to beneficiaries when probate is granted.
For example, an ISA worth £60,000 can be left to whomever the deceased chooses, but their surviving spouse or civil partner is entitled to invest up to that value in their own ISA, plus their annual personal allowance of £20,000, the following year, without paying any tax. “If you leave the money to them, in practice this means your spouse can inherit your ISA savings without losing the tax advantages,” says Rosie Hooper.
Kevin Brown, savings expert at the Scottish Friendly Society, says: ‘There has been a lot of talk about a reduction in inheritance tax (IHT) being included in the Budget, particularly around the exemptions currently enjoyed by pension savings.
‘While ISAs do not actively mitigate IHT to the same degree, removing such a benefit from pensions could increase the attractiveness of ISAs as an alternative.’
How families save £67,000 tax-free
Children are also entitled to save up to £9,000 tax-free each year, with parents investing £1.5bn in cash and stocks and securities Junior ISAs in 2021/22.
Kevin Brown says: ‘Although Junior ISA rules prohibit grandparents and other family members from opening an account directly, leaving it to the parent or guardian to do so first, once opened, other family members can contribute.’
For a family with two parents and three children under 18, this means being able to save up to £67,000 a year in several ISAs, none of which are subject to any tax.
It’s time to invest
Cash and investments offer different benefits and risks, says Ed Monk.
Cash is not vulnerable to losses like investments are. Investments, on the other hand, can lose value, but they have historically offered higher net returns over extended periods.
For those with a higher risk tolerance, investing in the Alternative Investment Market (AIM) through a stocks and securities ISA could be a viable option, says Rosie Hooper.
‘AIM ISAs allow you to invest in smaller, growing companies and under current rules, shares in these companies may qualify for business property relief,’ he says.
‘This can make them exempt from inheritance tax if they are kept for at least two years.’
But he warns: “The government could alter or eliminate these tax benefits in future budgets, which could affect the effectiveness of this strategy.”
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