Tax-Free Savings Under Scrutiny: What City Executives and Recent Changes Mean for You
In the ever-evolving landscape of UK taxation, recent discussions and proposals have brought the future of tax-free savings into sharp focus. City executives have been urging Chancellor Rachel Reeves to reconsider the caps on tax-free savings, particularly those related to Individual Savings Accounts (ISAs). Here, we will delve into the current state of tax-free savings, the proposed changes, and what these developments might mean for your financial planning.
Current ISA Allowances and Benefits
As of the 2025/26 tax year, the annual ISA allowance remains at £20,000 for adults, with £9,000 for Junior ISAs and £4,000 for the Lifetime ISA, which can form part of the £20,000 allowance.
ISAs offer a significant tax benefit, as any growth or income from investments held within them is sheltered from both income tax and capital gains tax (CGT). This makes ISAs an attractive option for those looking to grow their savings without the burden of taxation.
Proposed Changes to ISAs
There have been several proposals and discussions around potential changes to the ISA system. One of the key suggestions is to limit ISAs only to investments, effectively ending Cash ISAs. This idea has been put forward by industry figures who argue that it would help reinvigorate the UK’s capital markets by funnelling more of savers’ cash into assets like shares.
However, this proposal has met with resistance from leading building societies, which argue that it would hurt Cash ISA savers and reduce the ability of lenders to issue mortgages and other loans. An alternative suggestion is to reduce the scope for saving tax-free into a Cash ISA and instead expand the Personal Savings Allowance. Currently, basic rate taxpayers can earn £1,000 of interest outside an ISA before tax is due, while higher rate payers can earn £500, and additional rate payers have no Personal Savings Allowance at all.
Impact on Savers
If the government decides to implement any of these changes, it could significantly impact how individuals save and invest. For instance, if Cash ISAs are limited or abolished, savers might need to consider alternative tax-efficient savings options, such as Stocks and Shares ISAs or other investment vehicles.
The proposal to cap ISA wealth at £100,000, as suggested by the Resolution Foundation, could also affect long-term savers who have built up substantial ISA holdings over the years. Such a cap would mean that any amount above this threshold would no longer benefit from the tax-free status of ISAs.
Other Tax Changes Affecting Savings
In addition to the potential changes to ISAs, other recent tax changes are worth noting. The dividend allowance, for example, has been slashed from £1,000 to £500 for the 2024/25 tax year. The capital gains tax (CGT) allowance has also been halved to £3,000 from £6,000 for the same period. Furthermore, CGT rates have increased, with basic rate taxpayers now facing an 18% rate and higher or additional rate taxpayers facing a 24% rate.
Strategies to Minimise Tax Liability
Given these changes and potential future adjustments, it is crucial to plan your savings and investments strategically. Here are a few tips to help you make the most of the current tax landscape.
Utilise Your ISA Allowance
With the ISA allowance remaining at £20,000, it is essential to use this tax break while it is still available. Consider investing in a Stocks and Shares ISA, which can provide long-term growth and is sheltered from income tax and CGT.
Transfer Investments to ISAs or SIPPs
If you have investments in general investment accounts, consider transferring them to ISAs or Self-Invested Personal Pensions (SIPPs) to shelter them from tax. This process, known as “Bed & ISA” or “Bed & SIPP,” can help you avoid CGT and other taxes.
Gifting to Reduce Inheritance Tax (IHT)
With the IHT threshold freeze extended to 2030, gifting can be an effective way to reduce your IHT bill. However, it is important to plan carefully, as changes to pension rules from April 2027 will see most pensions falling into the IHT regime.
Conclusion
The landscape of tax-free savings in the UK is undergoing significant scrutiny and potential changes. While the government has not yet confirmed any immediate changes to ISA rules, it is clear that savers and investors need to be prepared for possible adjustments.
At Cutts & Co Accountancy, we recommend staying informed and planning ahead to maximise your tax savings. Utilising your ISA allowance, transferring investments to tax-efficient vehicles, and considering gifting strategies can all help you navigate the evolving tax environment effectively.
As always, it is advisable to consult with a financial adviser to ensure that your savings and investment strategies align with the latest tax regulations and your personal financial goals.
