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.
But with inflation expected to rise above 4 per cent over the coming months, there are concerns people’s wealth will suffer – with some commentators calling the failure to raise the allowance a form of stealth tax on savings.
The Chancellor, Rishi Sunak, last week decided to keep the the annual Isa allowance the same.
Heather Owen, financial planning expert at Quilter said: ‘At the last Budget in March, the Chancellor froze various rates and reliefs to sneakily increase the tax take as people gradually earnt more and as asset prices increased.
‘Now with inflation expected to average 4 per cent over 2022, the freezing of rates will be especially 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 in line with inflation, set by inflation figures for September.’
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What does this mean for savers?
Keeping the Isa allowance the same for six years – at a level of annual saving most could never hope to achieve – may not seem like a highly contentious issue, but when considered against inflation, it becomes all too clear how some savers stand to lose out.
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 worthwhile?
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 thought to have been caused by a combination of low rates and the existence of the 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.
With rates so low at the moment, it is unlikely many wiil breach these tax-free allowances. However, those with more substantial amounts of cash savings built up over the years, who have recieved inheritances, the proceeds from the sale of businesses, or cashed in pensions can find themselves 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.
Meanwhile, the best paying easy access Isa offered by Cynergy Bank currently pays 0.65 per cent and Paragon is offering the top one year fixed rate cash Isa paying 0.91 per cent.
With inflation at 3.1 per cent in September and the Office of Budget Responsibility forecasting it to rise as high as 4.4 per cent next year, the best savings rates on offer will do little to prevent the purchasing power of your money from being gradually eroded.
Anna Bowes, co-founder of Savings Champion said: ‘Cash Isas have definitely waned in popularity over the last few years, since the introduction of the Personal Savings Allowance, as many savers no longer need to rely on the tax-free status of the Isa to avoid paying tax on their savings, especially with interest rates as low as they are at the moment.
‘However, for those that have larger amounts in cash, the cash Isa is a really important allowance, so it’s disappointing that it will yet again not be increased.’
An alternative for savers using cash Isas is to turn to stocks and shares but whether this is wise, will depend largely on each person’s appetite for risk and the length of time they will be investing for.
Matthew Brown, an adviser at Chartered IFA firm The Private Office (TPO) said: ‘With inflation on the rise, protecting savings and investments from tax can help mitigate some of the damage that inflation can cause.
‘Over the longer term, investing outside of cash could provide a better return, meaning you can potentially keep up with and better still outpace the rising cost of living.
‘However investing into anything other than cash should normally be considered for at least the medium term.
‘And you need to make sure you invest the money sensibly into a diversified and tax efficient portfolio, in line with your attitude to investment risk .
‘How comfortable you are with the inevitable ups and downs and how long you can invest the money for will be key in establishing how much risk you should take with your savings and investments.’