Warning for millions of consumers who will see their tax-free savings allowance halved

Savers are being urged to make the most of their annual ISA allowance.

Approximately 3.5 million consumers are on track to become higher-rate taxpayers by 2028/29, according to the latest fiscal risks and sustainability report from the Office for Budget Responsibility (OBR), and, as a result, will be eligible to earn less tax-free interest on their savings.

The Personal Savings Allowance (PSA) enables basic-rate taxpayers to take home £1,000 in interest from savings and investments each year before facing a tax bill, however, this threshold is halved to £500 for higher-rate taxpayers.

To make matters worse, the report forecasts a further 0.6 million people will be pushed into the additional-rate tax band over the next four years and will therefore be taxed on any interest they accrue from savings (as they no longer qualify for the PSA).

“The fiscal drag is prevalent, and these latest statistics should be a stark warning for consumers,” said Rachel Springall, Finance Expert at Moneyfactscompare.co.uk.

Savers urged to use their ISA allowance

While average savings rates have trended downwards lately, some of the best returns remain higher than seen in recent years – putting those with smaller deposits at risk of exceeding their PSA.

“Savers need to take advantage of their ISA allowance and protect their hard-earned cash from tax,” urged Springall. Between 6 April and 5 April the following year, consumers can currently deposit up to £20,000 in total across ISAs, with any returns automatically tax-exempt.

However, it was reported last week that the Chancellor of the Exchequer, Rachel Reeves, is set to lower the amount that can be deposited into cash ISAs in a bid to encourage more people to invest.

“The debate on whether the yearly cash ISA allowance should be cut is ongoing, so savers will no doubt want to maximise their deposits in the meantime,” Springall explained.