It is time to get your savings ducks in a row, as Labour is eyeing up a tax assault on our nest eggs in the November Budget.
Not only is our right to use cash Isas to shelter vital savings from tax now under serious threat, but there will also be no unfreezing of the Personal Savings Allowance (PSA), which currently allows basic and higher rate taxpayers to shield respectively £1,000 and £500 of annual savings interest from tax.
The allowance has remained unchanged since its introduction in 2016.
If it had risen in line with inflation[1], basic rate taxpayers would now have a PSA of £1,380 and higher rate taxpayers £690.
The deep freezing of the PSA, together with static income tax[2] thresholds, means more savers will be dragged into paying tax on a chunk of their cash balances.
The only consolation is that yesterday sources close to the Treasury told Money Mail there are no plans to cut the PSA in the Budget – restricting it to basic rate taxpayers only – or to abolish it.
Here, Money Mail assesses the likely clampdown on tax-free cash savings – and reveals the seven measures you can take now to protect your savings from tax.
Cash grab: Chancellor Rachel Reeves is expected to introduce extra taxes on capital gains, dividends, inherited wealth, pensions and property
The evidence
According to experts, the Chancellor has a £50 billion black hole in the nation’s finances to fix – and with a commitment not to raise income tax, national insurance or VAT, her tax raising options are limited.
With businesses still reeling from last year’s Budget, Rachel Reeves has turned her eye – like the Eye of Sauron in Lord of the Rings – in the direction of our personal wealth.
As a result, extra taxes on capital gains, dividends, inherited wealth, pensions and property are all likely to feature in the next Budget. And it’s likely our cash savings will not be spared either.
A recent rearranging of the chairs within government circles has made this all the more likely with vehement supporters of wealth and savings taxes been given key roles in determining future taxation policy.
These so called ‘tax fanatics’ include Minouche Shafik who is the Prime Minister’s new chief economic adviser – and Torsten Bell, pensions minister, charged with helping the Chancellor prepare the Budget.
Both Baroness Shafik, former deputy governor of the Bank of England and Mr Bell (ex boss of the Resolution Foundation) are big fans of wealth taxes, previously calling for the abolition of inheritance tax[3] relief on farms and the inclusion of unused pension pots within the inheritance tax net. Both ideas were seized upon by the Chancellor in last year’s Budget.
Mr Bell’s appointment to help Ms Reeves with the Budget surely spells the end of cash Isas in their current form.
He has been a long-standing critic, claiming cash Isas exempt ‘huge amounts of better-off individuals’ savings income from tax’ when they should be a means ‘to encourage lower-income families to save’.
The tax breaks offered by Isas – both cash and share based Isas – don’t come cheap, costing the Treasury around £9.5 billion a year. That’s a bill Mr Bell and Ms Reeves would love to trim.
In the tax year to April 2024, the cost to the Exchequer of providing cash Isas was £2 billion, although that probably doubled in the last full tax year as a result of higher savings rates.
Although deposits into cash Isas are used by banks and building societies to provide mortgage finance to wannabe homeowners, Ms Reeves is adamant it is time for Isas to be more investment focused.
If this happened, it might not reduce the overall Isa[4] tax bill, but in the Chancellor’s eyes it would allow Isa investors to play their part in spurring economic growth by backing UK businesses and buying their shares.
Target: The tax breaks offered by Isas – both cash and share based Isas – don’t come cheap, costing the Treasury around £9.5bn a year
Currently, adults can contribute a maximum of £20,000 per tax year into an Isa. They can shield cash or shares from tax – or a mix of the two.
The Chancellor has already indicated she would like to see the annual amount put into a cash Isa[5] restricted – while keeping the £20,000 allowance for investors.
Ms Reeves was minded to confirm such a move in the summer, but delayed an announcement in response to fierce lobbying from lenders. Y
et, with Mr Bell now at her side, it would be a surprise if the reduction wasn’t announced in the Budget.
An annual cap on cash Isas of £4,000 has been widely reported, although it may be higher because of the lobbying from banks and building societies.
Any new limit would likely kick in from April next year. Alongside this cut to cash Isas, there will be no boost to the PSA in the Budget – another blow for cash savers.
Currently, as a result of a freeze on income tax thresholds, higher savings rates (until recently) and a PSA which has remained unchanged for nine years, more savers are paying tax on non-Isa cash accounts.
According to figures obtained by investing platform AJ Bell, 2.64 million people will pay tax on their savings in the current tax year, four times more than the figure four years ago.
Of these, nearly 900,000 will be higher rate taxpayers – five and a half times the number in the tax year to April 2022.
Just over half a million additional rate taxpayers, who have no PSA, will have an income tax liability on savings interest.
In terms of the tax paid on savings balances, it is likely to reap the Treasury a harvest this year of more than £6 billion, according to HM Revenue and Customs data supplied to Paragon Bank.
This is three times the bounty three years ago, with pensioners paying more than 40 per cent of the tax.
Although sources close to the Treasury told Money Mail that cuts to the PSA will not feature in November’s Budget, it doesn’t mean they won’t come at some stage as the ‘tax fanatics’ apply ever more taxes to our wealth and savings.
References
- ^ inflation (www.thisismoney.co.uk)
- ^ income tax (www.thisismoney.co.uk)
- ^ inheritance tax (www.thisismoney.co.uk)
- ^ Isa (www.thisismoney.co.uk)
- ^ cash Isa (www.thisismoney.co.uk)