A financial expert has warned that people with cash in ISAs could be at risk if Labour decides to make a tax raid on their savings. Speculation is growing about how the government plans to fill in a £22 billion black hole in the public finances it says it inherited from the last Conservative government.
Dan Neidle, a tax lawyer and the founder of the consultancy Tax Policy Associates said tax-free Isas could be in the firing line in an article in The Times. Currently all gains and interest earned in individual savings accounts (Isas) are tax-free for life — but this relief cost the government £4.9 billion in 2022–23 and is expected to cost about £6.7 billion in 2023–24.
People can can save up to £20,000 into Isas each year and there is no limit to the amount you can hold over a lifetime. Mr Neidle said that capping tax relief at £100,000 on money held in these accounts could raise about £5 billion this tax year.
If this happened and you had £500,000 in Isas you could have to pay tax on any interest or dividends paid on £400,000 of your savings at your income tax rate.
Mr Neidle said any tax raid would be unlikely to be backdated. “People have saved for years into their Isa on the promise of this particular tax treatment and many would see it as hugely unfair to change this. I don’t think the government would do that.” The Conservatives’ plans for a British Isa, which would have given an additional £5,000 tax-free allowance to those investing in British stocks, have reportedly been abandoned by the government.
But Sir Keir Starmer has warned the Budget on October 30 will be “painful” as he paved the way for tax rises. Isas remain the most effective way to shield your savings and investments from any tax changes.
According to the Telegraph a family of four could put as much as £116,000 in Isas between now and April 7 2025 using the full allowances available for the 2024-25 and 2025-26 tax years.
It takes minutes to set up an Isa or self-invested personal pension (Sipp) as long as you have personal and bank account details and National Insurance numbers. Quilter has estimated that individuals with £20,000 outside of an Isa will lose £135 or £335 this year, depending on their income tax bracket, due to the capital growth being lost to capital gains tax and dividend tax.
Shaun Moore, of Quilter, said: “Lower allowances and higher interest rates mean you will likely find that your personal savings allowance, CGT annual exempt amount and dividend allowance will be decimated very quickly. Even only relatively small gains can waste huge amounts of your allowances next tax year and therefore the sooner assets can be in a tax-sheltered environment like an Isa the better.”
As of April 2024 savers can open as many Isas as they want, where previously they could only open one of each type. This will allow savers to more easily take advantage of the top savings rates in the cash Isa market.
