Millions of households across the UK are bracing for a significant financial blow, described by analysts as a 'double tax raid' on £4.2 billion in savings. This follows Chancellor Rachel Reeves's Autumn Budget, which introduced major ISA reforms and extended a crucial personal tax freeze.
The Core Components of the Financial Squeeze
The dual pressure stems from two key policy decisions. Firstly, the tax-free allowance for cash ISAs is set to be slashed from £20,000 to £12,000. Secondly, the government has decided to extend the freeze on personal tax thresholds until the 2030-31 tax year. This combination is creating a perfect storm for savers.
Experts warn that freezing tax bands, a mechanism known as fiscal drag, will pull more individuals into higher tax brackets as their nominal earnings rise with inflation. This effect is now intensified by the reduced shelter offered by the new, lower ISA limit.
Immediate Fallout and Savers' Reactions
In anticipation of these changes, data from the financial platform Plum shows a dramatic rush to open cash ISAs. Account openings surged by 42% last week compared to the same period the previous year. Furthermore, national deposits into cash ISAs through banks and building societies jumped 29% month-on-month, representing a 13% annual increase.
Victor Trokoudes, founder and CEO of Plum, commented on the situation. "So while Rachel Reeves' intention is to get more people investing, it appears her rhetoric is having the opposite effect for the time being," he said. He added that the ISA reforms are worsened by the threshold freeze, heightening fiscal drag and putting more people at risk of exceeding their savings allowances.
"Additionally, there is salt in the wound after the Government announced that higher rates of income tax will be applied to savings that sit outside of an ISA," Mr Trokoudes stated.
The Concrete Cost for Basic and Higher Rate Taxpayers
Analysis from investment firm InvestEngine quantifies the direct impact. Their head of Investments, Andrew Prosser, explained that nearly 1.5 million basic-rate taxpayers and just under half a million higher-rate taxpayers deposited over £12,000 into cash ISAs last year.
With the new £12,000 cap, they must find another home for any excess savings. Prosser provided a stark example: If a saver puts the £8,000 difference into a standard 4.5% savings account, a basic-rate taxpayer would lose around £288 in tax over five years. For a higher-rate taxpayer, the loss could be as much as £1,080 over the same period, or £216 annually, once their total savings interest breaches the £500 tax-free allowance.
"This cut to the allowance could push many into paying unnecessary tax on their savings interest," Prosser warned.
Navigating the New Savings Landscape
Despite the blow for those planning to save large sums in cash ISAs, financial advisors see a potential silver lining. The change may encourage savers to consider investment options to preserve their full £20,000 tax-free allowance.
Andrew Prosser suggested a strategic shift: "By shifting part of their allowance - anything over £12,000 - into a stocks & shares ISA, savers can preserve the tax benefits of the full £20,000 limit while giving their money a chance to benefit from inflation-beating growth."
The coming years will test the resilience of UK savers as they adapt to this tightened fiscal environment, balancing the security of cash against the potential growth of investments to mitigate the effects of the government's new policy direction.
