With the rising cost of living and effects of fiscal drag, can savers really afford to overlook the tax benefits ISAs offer?
Many savers may be unnecessarily paying tax on their hard-earned cash, with more than a third (35%) of adults confessing to not holding an ISA. This is according to the second annual Savings Index from high street bank, NatWest, which uncovered a worrying lack of understanding surrounding the tax-benefits ISAs can offer.
In particular, younger adults demonstrated limited knowledge of ISAs and their financial advantages, with “more than a fifth unaware of any ISA product”, said Mo Watt, Customer Journey Manager at NatWest. Less than half (41%) of those aged 18 to 24 had an awareness of cash ISAs compared with 73% of all respondents; meanwhile, 37% of younger adults were aware of stocks and shares ISAs compared with 60% of all respondents.
But, with savings accounts still offering higher interest rates than in previous years, Income Tax bands set to remain frozen until at least 2028 and the rising cost of living, can savers afford to overlook opportunities that could potentially reduce their tax burden?
Individual Savings Accounts (better known as ISAs) provide a tax-efficient way of saving.
While basic-rate taxpayers can earn up to £1,000 in tax-free interest each year under the Personal Savings Allowance (PSA), many are being dragged into a higher tax bracket due to wage inflation and frozen Income Tax bands (a process known as fiscal drag) and seeing their allowance slashed.
At the same time, higher interest rates mean those with smaller balances may be at risk of exceeding their allowance and paying tax on the interest earned from their savings - many for the first time (calculate how much interest you could earn with our lump sum savings calculator).
An ISA shelters your savings and investments from Capital Gains and Income Tax; you can deposit a combined total of up to £20,000 in these accounts each tax-year. For more information, visit our ISA chart or view our catalogue of ISA guides.
The weeks leading up to the end of the tax-year (5 April) are usually a popular time for savers looking to use up the last of their £20,000 ISA allowance before it automatically resets once the new tax-year begins (6 April). As such, you’ll often find providers offering competitive returns on ISAs or launching attractive new accounts in an attempt to entice customer deposits – a phenomenon known as ISA season.
However, some may feel an added sense of urgency to utilise their allowance amid talk of ISA reform. While the Chancellor of the Exchequer, Rachel Reeves, reportedly won’t be cutting the cash ISA allowance in her Spring Statement later this month (26 March) as many had anticipated, such changes can’t be ruled out of the Autumn Budget towards the end of this year.
“The speculation for restricting the cash ISA limit will be a huge concern to savers who frequently take advantage of their yearly allowance,” said Rachel Springall, Finance Expert at Moneyfactscompare.co.uk. She added “any radical changes to the current system will also have an impact on providers” which rely on consumer deposits to fund their lending.
For help with tax-planning, consider speaking to a financial adviser; Kellands Hale is the preferred financial planner of Moneyfactscompare.co.uk.
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