From April next year, the tax paid on savings interest is due to rise by 2 percentage points, taking the rate to 22% for basic-rate taxpayers, 42% for higher-rate taxpayers, and 47% for additional-rate taxpayers. At the same time, the Labour Party government is set to reduce the amount under-65s can put into a cash ISA each year from £20,000 to £12,000, limiting the opportunity to shelter savings from the taxman.
A double blow for savers
Higher taxes on savings interest, coupled with a cut to the annual cash ISA allowance, could see more savers raided. Sean McCann, chartered financial planner at NFU Mutual, said: "Increases in taxation mean that the protection offered by ISAs is more important than ever, as returns that would have been lost in tax remain invested and can compound over time."
"As incomes rise and allowances remain frozen, an increasing number of people are being dragged into higher tax bands. The increase in tax on savings interest from April will mean that many will find themselves paying up to 47% tax on their savings interest."
How ISAs can help avoid tax traps
McCann added: "ISAs can help avoid a number of different 'tax traps'. Income from savings and investments held outside an ISA is included when calculating the Child Benefit tax charge and, for those with income over £100,000, it also contributes to the erosion of the tax-free personal allowance, whereas income from ISAs is not included."
The extra 2% tax on savings interest from next April is the latest in a wave of tax increases endured by savers and investors over recent years, including the hike in dividend tax earlier this year and the increase in capital gains tax rates.
Further increases feared
McCann expressed concern that the new Prime Minister may seek to increase the amount of tax raised from savings and investments still further. The combination of rising tax rates and reduced ISA allowances means savers need to act now to protect their returns.
