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It’s exactly six months until the end of the tax year, with ISA rule changes set to come into effect the following day and Brits being urged to make use of allowances beforehand.
In particular, the cut to cash ISA limits is seen as a pivotal change within the tax-free environment – but not the only one.
Here’s what’s changing and what you can do about it beforehand.
Cash ISA allowance cut to £12,000
Not everyone can max out the annual £20,000 ISA allowance, of course, but those who can currently have pretty unrestricted choice when it comes to where the money goes, other than a £4,000 lifetime ISA cap.
For under-65s however, in April the limit on putting money into a cash ISA will be £12,000 each year – if you want to put away any more than that into the tax-free wrappers, it will have to go into investing opportunities.
That’s far from an unreasonable option, given over the long term investments can rise by more than cash alone, but for those who want short-term access to their money or are purely building savings before any longer-term funds, the limit is certainly one to be aware of.
George Sweeney, personal finance expert at comparison site Finder, says the incoming cap doesn’t automatically mean savers should rush to pile everything in before April, but should instead understand what the changes are intended to help achieve.
“For under-65s, the next six months is the final opportunity to maximise your £20,000 annual allowance for short-term goals, like buying a home or holding a significant emergency fund buffer,” he said.
“However, don’t rush to stuff your cash ISA unnecessarily. If you’re saving for the long term, use this as an opportunity to brush up on the benefits of investing and consider using more of your allowance towards smart investments within a Stocks and Shares ISA instead. After all, that’s the whole reasoning behind this incoming tinkering with the ISA allowances.
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“So, use this time to make the most of your generous cash ISA allowance while you can, but don’t do it for the sake of it or at the expense of your long-term goals.”
For those aged 65 and over, they will still be able to save up to the maximum of £20,000 a year into their cash ISA.
Tax on interest earned in stocks and shares ISA
We’ve typically called ISA products tax-free – but that officially won’t be the case next year after it was announced over the summer that those who hold cash in their stocks and shares ISAs will be taxed on interest earned.
The rate will be 22 per cent and you’ll be billed accordingly, which will become a tiresome task given holding cash is a perfectly normal part of investing – after selling a stock or fund, for example, or after putting a monthly allowance into your account and waiting for the moment to buy.
To be clear, it’s 22 per cent tax on the interest earned, not the cash – so if you earn 3 per cent interest on uninvested cash in your stocks and shares ISA and have £3,000 cash in your account for a full year, you’d earn £90 and face a £19.80 tax bill on that money.
There’s not much you can do to avoid this other than turn off interest-earning or never have any cash sat in the account – both of which are exasperating and unnecessary to consider and highlight just how absurd the incoming rule is.
In another change, you also won’t be able to transfer funds from stocks and shares (SAS) ISA to cash, though you can do vice-versa still – again to effectively lock investing money there rather than bypassing the cash limits.
Lifetime ISA has another year to run
Finally, if you are saving to purchase a property through ISAs or considering doing so, you’ve got a bit more time.
There is an incoming First Time Buyer (FTB) ISA, but that’s not expected to be available until April 2028.
Accordingly, the current Lifetime ISA (LISA) will still be available to open until that date as well – you can still open one in the meantime if you are eligible, to keep your options open or begin compounding money until details are clearer on the FTB ISA.
There remains some opposition to aspects of the reform here, including the government not paying the top-up bonus until a consumer buys their property using a FTB ISA – meaning they’ll miss out on years of compounding, but seen as a way to avoid penalties.
Moneybox, one of the UK’s LISA providers, has shown research suggesting replacing the monthly bonus payments with a single payout at purchase will see a typical 10-year saver miss out on £3,606 in compound growth.
When investing, your capital is at risk and you may get back less than invested. Past performance doesn’t guarantee future results.
