The annual Isa limit will remain stuck at £20,000 for 2022 to 2023 – delivering six years over which it will not have budged.
The £20,000 tax-free Isa saving and investing allowance has been in place since April 2017, with savers and investors seeing feast turn to famine after the limit rocketed from £11,880 to £15,000 in July 2014 before getting another big boost just under three years later.
People will continue to be able to save or invest up to £20,000 each tax year into either a cash or stocks and shares Isa whilst shielding any interest, dividends or capital gains from tax.
However, inflation is expected to rise above 4% over the next months. There are concerns that people’s wealth may be affected. Some commentators call the failure to increase the allowance a stealth tax on savings.
The Chancellor, Rishi Sunak, last week decided to keep the the annual Isa allowance the same.
Heather Owen, financial planning specialist at Quilter, stated that the Chancellor had frozen various rates and exemptions to sneakily raise the tax take in March’s last Budget. This was because people were gradually earning more and asset values increased.
“Now that inflation is expected to average 4 percent by 2022, the freezing rates will be particularly powerful.
‘The Isa limit has remained at £20,000 since 2017/18, so will be unchanged for a total six consecutive tax years.
“It was previously increased to keep pace with inflation, according to September’s inflation figures.
| Tax year | There is no limit overall |
|---|---|
| 2010/11 | £10,200 |
| 2011/12 | £10,680 |
| 2012/13 | £11,280 |
| 2013/14 | £11,520 |
| 2014/15 | £15,000 |
| 2015/16 | £15,240 |
| 2016/17 | £15,240 |
| 2017/18 | £20,000 |
| 2018/19 | £20,000 |
| 2019/20 | £20,000 |
| 2020/2021 | £20,000 |
| 2021/2022 | £20,000 |
| 2022/2023 | £20,000 |
What does this mean to savers?
While it may not seem like a contentious issue to keep the Isa allowance unchanged for six years, at a level of annual savings most could never reach, it becomes clear how many savers stand to lose when compared to inflation.
Since the start of 2017, inflation has risen by 11.45 per cent meaning £20,000 today was the equivalent of £17,945 at the start of 2017 in terms of purchasing power.
Were inflation to rise by 4 per cent on average over the next 12 months, then today’s purchasing power of £20,000 will require £20,800 in a year’s time.
If the Isa limit had been updated in line with inflation each year since the start of the 2017/18 tax year, then the current adult Isa limit would be £21,776 for the 2022/23 tax year.
Although many people won’t come close to exceeding the Isa limit, those able to save or invest in excess of £20,000 stand to lose out.
For savers, if the Isa limit had been raised in line with inflation this could have saved a basic rate taxpayer £355 in tax, whilst for a higher rate taxpayer this could have spared an additional £710 from the taxman.
The good news is that an tax-free savings allowance applies on the first £1,000 of interest for basic rate taxpayers and £500 for higher rate taxpayers, but the bad news is that the tax-free dividend allowance was cut from £5,000 to £2,000 in 2018 and tax rates on payouts are due to rise next year.
Owen said: ‘This may not seem like much more than £20,000, but it adds up to be a significant cost saving for the Government, and a significant loss for savers and investors, who miss out on the chance to shelter capital from income tax, capital gains and dividend taxes.’
Is a cash isa still worth it?
For the first time in their 22-year history, money has flowed out of cash Isas for six months in a row.
Recent Bank of England figures show that £2.6 billion has been withdrawn from cash Isas in the six months to the end of July.
This is believed to be due to low rates and the existence personal savings allowance.
Introduced in April 2016, the personal savings allowance gives people who normally pay the basic tax rate of 20 per cent, the first £1,000 of interest a year tax-free in an ordinary account. For higher-rate taxpayers the allowance is £500.
It is unlikely that many will violate these tax-free allowances, as rates are so low right now. However, those who have more substantial cash savings and have received inheritances, proceeds from the sale or pensions, can be hit.
A basic rate taxpayer using Al Rayan Bank’s market leading 1.45 per cent one year fixed rate deal would need to have over £68,000 stashed away in the account to hit their tax threshold, whilst a higher rate tax payer would need to be saving over £34,000 to breach their £500 allowance.
Cynergy Bank offers the highest paying easy access Isa at 0.65 percent, while Paragon offers the highest one-year fixed rate cash Isa at 0.91 percent.
With inflation at 3.1% in September and the Office of Budget Responsibility predicting it to rise to 4.4% next, even the best savings rates will not stop your money’s purchasing power from gradually reducing.
Savings Champion co-founder Anna Bowes said that Cash Isas have waned in popularity since the introduction Personal Savings Allowance. This is because many savers don’t need to rely upon the tax-free status Isa to avoid paying taxes on their savings, especially when interest rates are so low.
“However, for those who have more cash, the cash Isa can be a very important allowance. It’s therefore disappointing that it won’t be increased again.”
Stocks and shares are an alternative to cash Isas for savers. However, this decision will depend on each person’s willingness to take risks and the length of their investment.
Matthew Brown, an advisor at Chartered IFA firm The Private Office, (TPO), stated: “With inflation on the rise,” Protecting savings and investments from taxes can help mitigate some damage that inflation could cause.
Investing outside of cash may provide a higher return over the longer term. This means that you can potentially keep pace with, or even better, the rising cost of living.
“However, investing in anything other than cash should be considered for the minimum medium term.
“And you should make sure that you invest the money sensibly in a diversified portfolio that is tax efficient, in line with your attitude towards investment risk.
How comfortable you are with the inevitable downs and how long it takes to invest the money will determine how much risk you should take in your savings and investments.