Lost in the hullaballoo that ended up engulfing last week’s Budget was a boon for tax-free saving.
George Osborne declared that the Isa allowance would increase to £20,000 in April 2017. The Chancellor has practically doubled the limit, which was £10,200, since he took office in 2010.
It’s an inspired move. When you throw in the pensions allowance — currently £40,000 a year — it’s hard to see how anyone could want for more. I can think of very few people outside the super-rich with the means to stash away more than £60,000 a year.
The boost means that almost all of today’s school and university leavers will never pay tax on their savings, and all the growth on their investments will be tax-free.
Isa boon: There was hidden treat for savers inside George Osborne’s budget box this week but older people have been left paying through the nose
Then, in retirement, withdrawals from Isas are tax-free (keep your fingers crossed it stays that way…) and everyone gets at least a quarter of their pension tax-free, too.
Slowly but surely tax on savings is being abolished in Britain. It’s exactly what I called for in this column last week.
Sadly, there’s a nasty side-effect to Mr Osborne’s bold support for Isas: he’s inadvertently created a savings apartheid between generations.
While youngsters may never see a penny pinched by the taxman, older people have been left on a creaking savings tax system and paying through the nose.
Under the Chancellor’s savings revolution, the millions who hold accounts outside Isas will be spared tax on the first £1,000 of interest if they’re basic rate 20 per cent taxpayers and £500 if they pay high-rate 40 per cent taxes (top-rate taxpayers get nothing).
But after that there’s a bill to pay. As Money Mail has reported over the past few weeks, HM Revenue & Customs is in utter chaos over how to collect these dues.
The tax office wants to deduct savings tax from our salaries or pensions instead of banks removing it from our interest automatically.
But it hasn’t a clue how much interest we’re earning until the end of the tax year. So — surprise, surprise — officials are plucking figures out of the air and snaffling whatever they like by fiddling people’s tax codes.
Most of those hit by this roulette-style tax grab will be pensioners who have scrimped for years to build a fighting fund.
The only way to beat the raid is to shift as much into Isas as possible. That makes the higher £20,000 allowance useful.
For those taking the plunge, I do hope our 2016 Isa guide helps ease the way.
Lisa lifeline?
And it gets better for younger savers. From April 2017, they’ll be able to open one of the new Lifetime Isas (Lisas). With these, you can save £4,000 a year and get a 25 per cent top-up.
The money can go towards a first house or retirement.
It’ll cost the Treasury around £850 million a year and means the most diligent savers can collect £33,000 in hand-outs over their working career.
But there is a catch. This new Isa deal is likely to be the Trojan horse that may destroy the pensions of those it was supposed to help.
George Osborne is desperate to cut the £34.3 billion-a-year tax relief bill. I expect to see the £40,000 annual pension allowance stripped to the bone and the Chancellor to ratchet up the Lifetime Isa allowance instead.
Before long, we may see a £10,000 pensions allowance and £15,000 for Lifetime Isas. Why? Because cutting the pensions allowance is cheaper than raising the Isa limit.
Both the Lifetime Isa and pension give basic-rate taxpayers roughly the same boost. But for higher-rate and top-rate taxpayers, who make the lion’s share of pensions contributions, the Lifetime Isa deal pales compared to a pension, where the Government offers 40 per cent or 45 per cent tax relief.
It could prove a money-spinner for Mr Osborne but may also leave some working families poorer in retirement if they raid their Lifetime Isa and pay a penal 5 per cent charge and lose their top-ups.
My tip would be to gobble up as many of these new savings incentives while you still can. It’s anyone’s guess what will still be around in four years’ time.