Isa and Junior Isa spending limits will be frozen at their current levels until at least 2023 under the Treasury’s Autumn budget plans, in a move that could hit investors with tax and harm savers if inflation begins to multiply further down the line.
Chancellor Rishi Sunak outlined the annual payment limit for adult Isas will be frozen at £20,000 for at least another tax year – the fifth year in a row that it’s remained at this level.
By placing money in an Isa, savers avoid income tax on interest and capital gains tax on investment performance.
If the allowance had increased with inflation each year since 2017, it would stand at £21,440 today, meaning savers would have an extra £1,440 they could shelter from the taxman.
Meanwhile, the Junior Isa allowance will also be frozen at £9,000 – where it’s been since it was doubled in 2020.
It comes after a pandemic-induced boom in Isa investments this Spring, as people with accumulated cash from decreased spending during Covid funnelled £1.5bn into the accounts in April alone.
But for savers who have been searching for yield in a record low interest rate environment since the financial crisis, the move, paired with the OBR’s forecast that inflation could average 4 per cent next year, could mean a perfect storm where they lose cash in real terms day by day.
“It’s disappointing, but not surprising, that the government has frozen the ISA allowance at the same time as the OBR has sharply revised up its inflation forecasts,” said Richard Flax, chief investment officer at Moneyfarm.
“It’s a stealth tax that constrains British savers’ ability to ensure a comfortable future for themselves,” Flax said.
Although the OBR has calculated that the freezing of the allowance won’t cost us significantly more in tax in the next year, it is set to cost £5m in 2023/24, £10m in 2024/25, £15m in 2025/6 and £10m in 2026/7 – and this is just the cumulative effects of freezing for one year.
If the allowance is frozen again in the coming years, this will push tax bills higher.
“Freezing allowances is a tax rise by the back door and is a sneaky way for governments to make more money, or at least spend less on tax breaks,” said Laura Suter, head of personal finance at AJ Bell.
“The move means that those with more than the current £20,000 limit to save each year could end up with assets outside an ISA, which they then have to pay capital gains tax or income tax on,” Suter warned.
And this will hit investors “hardest in years when dividends are generous,” says Sarah Coles, Senior Personal Finance Analyst at Hargreaves Lansdown.
This is because outside the Isa, dividends over £2,000 will be taxed by an increased rate of 1.25 per cent from April, according to Sunak’s plans.
“This will do damage in years where they crystalise gains above the capital gains tax allowance, which has also been frozen, affecting people particularly when we see strong investment growth,” Coles said.
But Suter points out that it’s a problem that doesn’t affect much of the population, as the average amount UK savers pay into their Isas each year is £6049 – well under the £20,000 allowance.