Several tax rates are increasing under the new HMRC regime
Savers have been warned that tax rates are “creeping up” as some account holders face having to pay two 22 per cent tax charges. Major changes to the ISA rules are just months away from taking effect, but there is another quiet tax hike that you may have overlooked.
From April 2027, the Government plans to cut the cash ISA allowance, in hopes of pushing more people toward investing in stocks and shares. You currently get a £20,000 deposit allowance that can you divide however you want between cash ISAs and stock and shares ISAs. Yet under the new rules, £8,000 of this will only be available for investment-based accounts, so you will only be able to put up to £12,000 into cash ISAs.
People aged 65 and over will keep the current £20,000 allowance. You will get the full allowance in the tax year that you reach the age of 65. To discourage people from holding cash within a stocks and shares ISA wrapper, the Government is imposing a 22 per cent tax charge on any interest earnings on cash held within investment-based ISAs.
People may not be aware
But there is another 22 per cent levy that could hit savers in the pocket, as several existing tax rates are also hiked from April 2027. Kirsty Stone, chartered financial planner at The Private Office, was asked about the package of changes on the BBC Money Box podcast.
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She confirmed that some tax rates are “creeping up and up” and that many taxpayers “won’t necessarily be aware of” the changes. In addition to the ISA changes, the tax you pay on any savings interest you earn outside of tax-free wrappers are also rising by two percentage points, across all tax brackets.
Tax increases
This is what it will mean:
- For basic rate taxpayers, the rate is increasing from 20 per cent to 22 per cent
- Higher rate: Up from 40 per cent to 42 per cent
- Additional rate: Up from 45 per cent to 47 per cent
Tax-free allowance rules
As such, it is worth bearing in mind the savings allowances which apply depending on your income tax bracket. This is how much you can earn in cash savings interest each year, outside of your ISAs:
- Basic rate taxpayers: £1,000 a year
- Higher rate: £500 a year
- Additional rate: Zero allowance.
Ms Stone warned that the new rules could make things confusing for savers. She said: “I think the easiest and simplest way to save money tax-efficiently has been an ISA arrangement.”
‘Feels more complicated’
“And so the complications here are something completely new and people aren’t aware or prepared for it.” She said that historically the simplicity of ISAs has been “fantastic to engage people in saving”, yet these extra regulations could “deter people from wanting to save because it feels more complicated”.
Sarah Harrison, chief executive of the Building Societies Association, also raised concerns that the changes may not actually encourage people to get into investing. She said:”We support the Government’s aim of helping more people to invest, but weakening cash ISAs could have the opposite effect.”
As such, the association is calling for the Government to pause the plans. Ms Harrison said: “We believe a sensible approach is for the Chancellor to pause the changes for two years, giving time to assess the full impact of other steps being taken to support people to invest with confidence.”
She pointed to research from the University of Bristol showing that 70 per cent of cash ISA holders oppose the overhaul.
You can listen to the full Money Box podcast on BBC Sounds.
