Savers piled £42bn into cash Isas in first half of 2024 to avoid tax sting

Savers have piled £42bn into cash Isas in the first six months of the year, new data shows.

There was £351.6bn in adult cash ISAs at the end of June, compared with £309.3bn at the end of December 2023, Paragon Bank figures reveal.

Many savers are likely to be putting money into Isas to avoid a potential tax bill on savings and, more recently, to protect as much tax-free cash as possible amid rumours of a range of tax measures the new government could introduce.

Fixed-rate cash Isas led the charge, jumping from £157.9bn to £188.5bn over the six-month period, analysis of CACI data collected from 40 savings providers shows.

Easy Access ISA balances also saw a boost, rising by £11.2bn to reach £156.4bn.

Notably, the value of cash held in fixed-rate ISAs exceeded that of non-ISA fixed-rate savings accounts in June 2024 for the first time since November 2022.

Overall, total adult cash savings balances rose by £70.7 billion to £1.18 trillion during the first half of the year.

What’s behind Isa’s script?

Savers have been looking for ways to protect their savings from a tax attack as higher interest rates have boosted returns earned on cash savings over the past two years.

HMRC’s latest estimates show that £10.4bn in savings interest tax is expected to be raised this tax year, compared with £9.1bn in the 2023/24 tax year.

High savings rates have been good news for savers, but they are a double-edged sword as they have also caused many savers to exceed their Personal Savings Limit (PSA), which has been frozen at the same level since 2016.

The PSA means that basic rate taxpayers pay no tax on the first £1,000 of interest earned each year, while higher rate taxpayers get a £500 allowance. Additional rate taxpayers do not receive a PSA.

When the PSA was introduced in April 2016, the best one-year fixed-rate bond on the market paid 1.91 per cent, so a basic rate taxpayer would have beaten the £1,000 PSA with a £52,357 deposit.

Today, the best one-year bond pays 4.95 per cent, so a basic rate taxpayer would exceed the limit by £20,230.

Similarly, the best easy-access account available in April 2016 paid just 1.45 per cent, so the PSA base rate would have been exceeded with a deposit of around £69,000.

With today’s highest rates paying around 4.9 per cent, £20,000 in an easy-access account would generate £980 in interest.

The big appeal of cash savings accounts is that savers can put away up to £20,000 each tax year to protect their savings interest from tax, as any interest earned is completely tax-free, unlike easy-access or fixed-rate savings accounts.

As a result, savings have been pouring into ISAs in record numbers. In the first month of this financial year alone, savers have piled a record £11.7bn into cash ISAs, Bank of England figures show – the biggest inflows for the start of the financial year since the tax-free accounts were launched in 1999.

The average Easy Access Cash ISA pays a rate of 3.26 per cent, while the average one-year ISA pays 4.25 per cent, according to rates tracker Moneyfacts Compare.

This time last year the average easy-access ISA was paying 3.15 per cent, while the average one-year ISA was paying 5.27 per cent.

The fact that average rates on one-year Isas have fallen has not deterred savers from piling an extra £30.6bn into one-year Isas in the first six months of 2024.

Savers can find easy-access cash ISAs that pay up to 5 per cent, while the best one-year fixed-rate ISA pays 4.67 and the best two-year fixed-rate ISA offers 4.4 per cent.

Derek Sprawling, managing director of savings at Paragon Bank, said: ‘The level of cash ISA deposits has soared in recent months, particularly at the fixed rate end of the market, where the level of balances has doubled since the end of 2022.

‘The rise is understandable given that rising savings rates mean more savers face the prospect of paying tax on money held in non-ISA accounts.

‘Although rates have moderated from their peak levels, there are still many higher rate taxpayers who could still benefit from using their ISA allowance to limit their exposure.’