HMRC is set to send out tax bills of up to £9,400 following a change to the Cash ISA allowance, according to a warning from investment platform AJ Bell. The reduction in the Cash ISA allowance, combined with frozen personal savings allowances and higher tax rates, creates a triple blow for cash savers.
Triple Blow for Savers
The Cash ISA allowance cut is expected to increase tax bills for millions of savers. AJ Bell highlights that over five years, an additional-rate taxpayer could face a £2,380 tax bill on the lost £8,000 of ISA savings, rising to £9,349 over 10 years. Higher-rate taxpayers may see an extra tax bill of £1,152 over five years, increasing to £6,464 over 10 years under the Labour Party government. The government is expected to gain from the extra tax on savers' interest.
Expert Commentary
Laura Suter, director of personal finance at AJ Bell, commented: “The decision to cut the Cash ISA allowance for those under the age of 65 is going to lead to bigger tax bills for the nation. While the government is hoping the move will nudge more people into investing, in reality many will just leave their money in non-ISA accounts and pay tax on their savings interest.”
Ms Suter added: “AJ Bell research found that if the Cash ISA allowance was cut, most Cash ISA savers (51%) would simply stick the money in a taxable savings account. If they did this, they would be landed with a juicy tax bill after a number of years. Someone who usually paid the full £20,000 into their Cash ISA, who was then limited to £12,000 from April 2027, would find themselves with £8,000 of cash looking for a home.”
She explained: “If you look at one year alone, and assume 4% interest on the cash, it doesn’t represent a huge sum of interest: just £320. This means it’s covered by the personal savings allowance for both basic-rate and higher-rate taxpayers, assuming they have no other taxable savings, and lands additional-rate taxpayers with a £150 tax bill. But over a number of years the tax bill really adds up. Over five years the total bill for an additional-rate taxpayer is £2,380 and over 10 years it totals a whopping £9,349 extra in tax. Even a basic-rate taxpayer, who gets a £1,000 tax-free allowance each year for their savings interest, will see a £240 tax bill after five years and a chunky £2,402 bill over 10 years.”
