- Savers will have more cash outside their Isas – and the Government knows it –
Savers will pay £605m a year in extra tax by 2029 as the Government freezes how much can go into Isas.
Government rules allow savers to invest £20,000 a year in Isas, £9,000 in Junior Isas and Child Trust Funds and £4,000 in Lifetime Isas.
Any money this cash earns in interest is not taxable, unlike most other savings offers.
These limits remained frozen in the recent Budget, meaning savers with these deals will end up paying £605m a year in extra interest by 2029/30, according to Government figures.
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The additional tax occurs because once someone has topped up their Isas with £20,000, they start paying tax on any interest they earn, and the same principle applies to £9,000 for Junior Isas and Child Trust Funds.
The reason more savers will pay tax overall by 2029/30 is that the value of £20,000 will now be worth considerably less due to inflation.
As the value of money decreases, more savers will find themselves filling up their Isas faster and then facing a tax bill. This will affect wealthier savers, who can save more of their money.
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Basic rate taxpayers can earn £1,000 in interest before paying tax – the Personal Savings Allowance (PSA) level.
Higher rate taxpayers can earn £500 before paying tax, while additional rate taxpayers don’t have any PSA, so they pay tax on any savings interest held outside of an Isa.
Basic rate taxpayers pay 20 per cent tax on savings interest earned outside of an Isa and certain other savings arrangements, such as NS&I premium bonds. For higher rate taxpayers, it is 40 per cent, while additional rate taxpayers pay 45 per cent.
For example, a basic rate taxpayer earning £2,500 interest on savings outside of an Isa would pay 20 per cent tax on £1,500 for a bill of £300.
A higher rate taxpayer in the same situation would have a bill of £800 as their PSA drops to £500 and they pay 40 per cent tax on £2,000.
An additional rate taxpayer in this hypothetical example would have a savings tax bill of £1,125, as they have no PSA and pay a rate of 45 per cent on all savings interest held outside of Isas.
Alice Haine, personal finance analyst at Bestinvest, said: “It is expected to freeze the annual subscription limit at £20,000 for a further six years, along with similar freezes on Junior Isas and Child Trust Funds, until the end of the 2029 financial year. -2030, raise £605 million for Government coffers.
‘If the Isa allowance had been increased in line with inflation since 2017 (the last time it was increased), it would be above the £26,000 mark this tax year.
‘If the figure continues to adjust in line with inflation until 2030, using the OBR’s inflation forecasts it could potentially approach the £30,000 point by then.
‘On the other hand, by keeping the Isa subsidy on hold, this is effectively a cut in the subsidy in real terms, as it does not keep pace with inflation.
“This means people can protect less of their money from tax if they are able to max out the allowance entirely, making the Isa allowance another stealth tax freeze.”
