Labour’s set to ship a wrecking ball to Isas, writes JEFF PRESTRIDGE – This is what you will need to do NOW to guard your self,
Is Rachel from Accounts about to make the most controversial and calamitous decision of her torrid eight-month tenure as Chancellor of the Exchequer by axing tax-free cash Isas?
According to some experts in the financial services industry I have spoken to in the past 24 hours, they fear it is under serious consideration.
And they predict an almighty saver backlash if Ms Reeves bows to the ‘City’ and gives the tax-friendly cash Isa a haircut to match that which the late great Telly Savalas had 60 years ago to play Pontius Pilate in The Greatest Story Ever Told (he shaved the lot off).
Indeed, the backlash has already begun, judging by the response to Saturday’s news story in the Daily Mail warning of a potential clampdown on cash Isa savers. Interestingly, a clampdown not denied by the Treasury.
As we report overleaf, savers young and old who responded to the Daily Mail article are united in their opposition to any diminution of the cash Isa.
Any assault on this key tax break, they argue, would send a wrecking ball through their household finances, and weaken their financial resilience.
Threat: Currently, eight million people a year put money into a cash Isa to protect their hard-earned savings from the taxman
They would also never forgive Ms Reeves if she took them away. For many, some of whom voted for Labour last summer, it would represent something of a ‘last straw,’ coming on top of the spiteful withdrawal of the winter fuel payment for millions of pensioners and the impending (retrospective) inheritance tax hit on pensions.
The message is loud and clear. Chancellor: Hands off our cash Isas.
And today Money Mail takes up the cause with gusto. Please, please, please, Rachel – listen to Britain’s legions of prudent, hard-working savers. Don’t make a catastrophic mistake you’ll live to regret.
Currently, eight million people a year put money into a cash Isa to protect their hard-earned savings from the taxman. In total, £300 billion is held in such accounts, managed by banks and building societies.
Although Left-wing think tanks such as the Resolution Foundation (not so long ago run by one Torsten Bell, now a Labour Treasury Minister) like to argue that cash Isas are primarily a vehicle for the wealthy to accumulate tax-free savings, nothing could be further from the truth.
Figures from HM Revenue & Customs indicate that of the 18 million people who have a cash Isa, almost half are held by people with incomes of less than £20,000 – with the average balance being just under £13,400.
In other words, cash Isas are held by low income and wealthy households alike. ‘Cash Isas are a widely held product,’ said one director of a building society yesterday to Money Mail. ‘They provide the foundation of many households’ savings, and a wise Chancellor would not get rid of such a key foundation stone.’
Since 2017, savers have been able to squirrel away a maximum of £20,000 a year into a cash Isa in the knowledge that their money is both risk-free (provided they stay within the £85,000 safety limit per deposit taker) and will not attract the eye of the taxman.
Against a backdrop of frozen personal and savings allowances and set-in-stone thresholds at which higher rates of tax kick in, the importance of cash Isas has never been greater.
Yet reform of the Isa regime now looks to be firmly on the Government’s agenda, which could result in the axing or diminution of cash Isas.
Any changes could come in as early as April next year, although an announcement about them would come quicker – maybe in the Chancellor’s Spring statement next month or in her autumn Budget.
An announcement about any possible changes to cash Isas could come in the Chancellor’s Spring statement next month
‘Potential reform of Isas has been bubbling away in the background for a while, as far back as before last October’s disastrous Budget,’ one insider said yesterday.
‘Yet it seems the debate in recent weeks has suddenly ignited. It’s become a version of the War of the Worlds with a City camp aggressively wanting Isas to be focused on investing – and another camp led by building societies which believes that cash Isas must remain inviolate for the greater good of the country.’
Until last weekend, the City camp was on the front foot. Depending upon who you speak to inside this encampment, cash Isas should be scrapped, capped (via a lifetime limit on balances) or the annual £20,000 contribution limit clipped.
The argument they put forward is that at a time when the need for economic growth is vital, the focus of the Isa tax break should now be 100 per cent on investing. Currently, people can choose how to use their annual Isa allowance – to save, invest or a mix of both.
These campaigners say people should be encouraged to use more of their annual Isa allowance to invest. This, they argue, would help provide finance to companies, boost the UK stock market – and give people the opportunity to earn higher long-term returns from their Isas.
The chorus from this camp has been most vocal with Andy Briggs, chief executive of giant pensions firm Phoenix, arguing that the ‘state should not be giving a tax break for us all to park our money in cash’.
Others have had their say, including The Lord Mayor of London, Alastair King. In an article for This Is Money, he asked the question: ‘Why should those investing purely in cash and non-UK equities [via an Isa] have the same tax breaks as those who take the risk to invest into UK-quoted equities?’
He answered the question himself: ‘The incentives appear misaligned.’ On another occasion, he described the tax break for cash Isa savers as ‘bizarre’.
Letters from the City camp have been sent to the Chancellor calling for Isa reform. Meetings are said to have allegedly taken place between City representatives and Ms Reeves, although those who have been reported as attending, such as Phoenix’s Mr Briggs, claim they weren’t there.
The London Stock Exchange has also held a series of recent discussions on reform of the country’s capital markets where speakers have called for Isas to be more investment rather than cash-oriented.
And today, the chairman of the City of London Corporation will call for the government to ‘encourage greater flows of capital into stocks and shares Isas’ so more people have a ‘stake in a dynamic UK economy’.
Rainy day funds
Hoa Doan, 32, is married and lives in north London. She works for a sustainability start-up company.
Hoa Doan funnels around £16,000 every year into her cash Isa by setting aside a certain sum of money from her wages each payday.
She has been saving into cash Isas for seven years and switched to provider Trading 212 a year ago.
Hoa cannot understand what the Government’s motivation can be behind potentially reducing the cash Isa allowance.
She says: ‘Why would they want to discourage people from saving? If young people don’t have that incentive that’s quite disappointing.’ She previously funnelled her savings into a lifetime Isa when she was saving for her first home, which is a one-bedroom flat that she managed to purchase five years ago.
Now Hoa uses her cash Isa to save for a rainy day and to boost her funds with an eye on her eventual retirement.
Hoa says she prefers the easy access nature of a cash Isa over a stocks and shares Isa.
She explains her thinking, saying: ‘My money is always going to be there and be safe.
‘I think investments are for when you have spare cash that you can afford to lose.’
The cash Isa fightback
The amount of oil poured on the cash Isa pyre has finally met with resistance, prompting the normally placid Building Societies Association (BSA) into action.
A week ago, it sent a letter to the Chancellor, warning her of the unintended consequences of any restrictions imposed on
saving into a cash Isa. The letter was penned by BSA boss Robin Fieth and exclusively revealed in Saturday’s Daily Mail.
Mr Fieth said: ‘The implication made by many of those calling for curbs on cash Isas is that the savings are lying idle and not supporting economic growth. But banks, building societies, credit unions and other providers use the deposits to fund loans to households and businesses.’
The head of the influential trade body went on to explain that any move to reduce the appeal of cash Isas would mean less money flowing into banks and building societies, forcing them to restrict their lending, driving up mortgage prices and potentially causing a housing market downturn.
Yesterday, Tom Riley, director of retail products at Nationwide, backed the BSA’s call. He told Money Mail: ‘Cash Isas help ordinary people save for their future. As a key part of how building societies, like Nationwide, are funded, they are vital to us being able to lend to first-time buyers.
‘At a time when it remains difficult to get a foot on the housing ladder and the cost of living is still high, the need for tax-efficient savings is as relevant as it ever has been – regardless of how much people are able to save.’
So what is the Treasury saying?
Yesterday, we asked the Treasury whether Ms Reeves would be curbing cash Isas. It had the perfect chance to kill the rumour mill and provide comfort to those who rely upon cash Isas.
Its response was neither here nor there. It said: ‘We want to help people save for their future goals and build greater financial resilience across the country. We keep all aspects of savings policy under review.’
It’s the third time this question has been asked of the Treasury in five days. It gave the same response to the Daily Mail last Saturday – and again to the Financial Times when it ran with our story on Monday.
Money Mail’s view is that where there’s smoke, there’s fire. Earlier this month City minister Emma Reynolds said the UK had ‘failed to drive an investment culture’, adding, ‘Why have we got hundreds of billions of pounds in cash Isas?’
The City camp seems to be winning the war so far. But over the past five days, thousands of readers have reacted angrily online to concerns that their ability to save into a cash Isa may be curbed, as reported in Saturday’s Daily Mail.
‘It’s dangerous to mess with people’s savings.’ ‘I would rather stick my cash under the bed rather than invest in risky stocks and shares.’ ‘Most people’s pensions are in the stock market. Keeping money in a cash Isa spreads risk.’ There’s plenty more comments along the same lines.
The message is clear, Chancellor: ‘Hands off our cash Isas.’
Jeff.prestridge@dailymail.co.uk
‘Why is Labour discouraging us from saving?’
Karen Simpson, 42, is self-employed and lives with her husband and two children in Inverness.
The former classroom tutor has held a cash Isa since 2017 – when she set up her own business.
Karen, who has worked hard to establish online tutoring business My
Primary and Secondary Tutor, holds an easy-access Isa with provider Plum.
She views the Isa as a way to plan for retirement alongside a private pension.
The tax benefit is a huge attraction and she maxes out the Isa with a lump sum every year.
Karen doesn’t hold any investments in a stocks and shares Isa.
Instead, she likes to keep money in cash as an emergency fund.
‘I like knowing that if I need to access it, I could,’ she says.
‘As I’m self-employed, there’s always a worry that my situation will change.’
Karen hopes that any proposed changes to cash Isas do not go ahead.
She says: ‘It’s not something I would expect from a Labour government.
‘They should be working more for people.
‘They should be incentivising people to save.’
Katy Todd is in her 70s, retired, has four grown-up children and lives in Aylesbury, Buckinghamshire, with her husband Stewart.
Diligent saver Katy is a retired not-for-profit worker and is using cash Isas to prepare for her care costs.
Katy lives with her husband Stewart, who is also retired, and who used to work in local government. She says: ‘I’m very conscious about the cost of care in the future.
‘People are spending in the region of £100,000 a year, so it’s important for me to save for that. ‘But it will be nice to have something left over in the cash Isas for my children, too.’
Katy also knows she can dip into her cash Isas – only if needed – to pay for visits to see her son and three grandchildren, who live in New Zealand.
She and Stewart try to visit every other year for a couple of months each time.
Katy, who has nine grandchildren and one great-grandchild, has held savings in a cash Isa since they were first introduced in 1999. As well as her cash Isa with Leeds Building Society, she also holds money in a stocks and shares Isa, along with Premium Bonds from National Savings & Investments and regular savings accounts, as part of what she calls a ‘balanced’ way of saving.
‘Cash Isas are for when you don’t want to risk investments, which is ideal really for later life,’ she adds.
What to do NOW to beat tax grab: Don’t panic – follow our tips to shield up to £116,000 tax-free
By RACHEL RICKARD STRAUS
The cash Isa is in jeopardy – and British savers need to act now to make the most of them while they can.
But this isn’t as simple as just shovelling as much money into cash Isas up to your £20,000 annual allowance while it is still possible – though this may be a good idea.
There are tips and tricks that can help max out the value of your Isa to help grow your savings – and to ensure that your money is protected from the Chancellor and the taxman.
Here, we reveal what all savers need to know – from the features you must demand of your cash Isa, to the dangers hidden in the small print to watch out for.
1. Use all the latest Isa bells and whistles
If Rachel Reeves does launch an attack on Isas it is unlikely to come into effect before April next year.
Savings experts say the administration work to implement such a change is so great, it couldn’t be done for the new tax year, which starts on April 6.
The good news is that gives you time.
So your first port of call is using up as much of the two £20,000 allowances for 2024-25 and 2025-26 as you can.
Do this on the basis that it also seems unlikely – although not impossible – that the Chancellor will introduce retrospective rules that remove the Isa ‘wrapper’ from your existing savings.
In other words, money saved into an Isa in previous years is likely to stay tax-free.
If you’re worried about putting all your accessible savings into an Isa in the coming months, you needn’t be.
Growing numbers of cash Isas are now ‘flexible’ accounts, which means you can take money out and put it back in within the same tax year – without it counting towards your allowance.
In many ways, a cash Isa can be used like an ordinary easy-access savings account – the only different being your interest is tax-free.
This feature is invaluable if you dip into your Isa regularly. Say, for example, you have £15,000 in an Isa and withdraw £10,000 to pay for some home improvements.
If your Isa was not flexible, you would only be able to save a further £5,000 into your Isa that tax year, before hitting your £20,000 allowance.
But with a flexible Isa, you could save £5,000 AND replace the £10,000 you’d withdrawn – a total of £15,000 before you hit your allowance.
The other advantage of flexible Isas is that because they make it so much more straightforward to dip into your cash whenever you need to, there is less need to keep a large balance in a current account for this purpose.
There are around 13 million current accounts held in the UK with a balance of over £5,001, according to Yorkshire Building Society. The account holders are missing out on hundreds of pounds in interest as most current accounts pay no interest at all.
Although flexible Isas have been around since 2016, and they are increasing in numbers, many providers still don’t offer them, including HSBC, Natwest, RBS and Santander.
Those that do have flexible Isas include Barclays, Halifax and Lloyds. Make sure you check before going ahead.
2. Open several Isas in the same tax year
Don’t worry if you’ve already opened a cash Isa this year without using up your full £20,000 allowance.
If the account won’t let you top up, you can just open another cash Isa for any remaining funds.
As of April last year, you are able to open as many Isas as you like within the same tax year – so long as you don’t breach your allowance.
Having more than one is also a great way to lock up savings that you won’t need to access for some time in a fixed-rate Isa, while keeping some that you can access if you need to in an easy-access version.
For example, you could save £15,000 in the top-paying one-year fixed rate Isa – 4.5 pc with Coventry Building Society – and £5,000 in the top paying easy-access Isa – 4.66 per cent with Chetwood Bank.
After a year, you would have earned £908.
You could opt to keep it all in easy-access and earn £932, but be aware that as the Bank of England base rate continues to fall, the best fixed-rate deals are likely to become less generous so banking one now could prove prudent.
Isa providers are permitted to offer customers more than one in a tax year, but in reality many have computer systems that are far too old-fashioned to execute it – so pick carefully.
If you hold multiple Isas, it is up to you to ensure you don’t breach your total allowance of £20,000. And don’t think HMRC won’t find out if you go over – it will. Providers send reports to HMRC each year.
3. Use perfect combo to cut your tax bill
By planning out how you’d react, you can soften the blow if the axe falls on cash Isas next year. A key weapon in your fightback should be the personal savings allowance.
This permits you to earn up to £1,000 interest on savings held outside of an Isa without paying tax.
That assumes you’re a basic-rate taxpayer. Higher-rate taxpayers have an allowance of £500 while additional rate taxpayers have none.
As interest rates have risen in the past couple of years, growing numbers of savers are facing tax bills – over six million at the latest count.
With the best interest rates hovering at around 5 per cent, a basic rate taxpayer would only need £20,000 saved in an ordinary account to breach their personal savings allowance.
A higher-rate taxpayer would breach theirs with £10,000.
If your savings balance outside your Isa is under this sum, you don’t have to worry. Otherwise you’ll need to think outside the box to beat the Chancellor’s potential tax grab.
If you are saving monthly rather than in one lump sum, regular savings accounts are a great option to hold outside of your Isa.
These offer rates as high as 7 per cent – far better than on other types of savings account or Isa. They are designed to encourage savers to save regularly, but have a cap on the amount you can put into them every month.
For example, First Direct offers its customers 7 per cent interest on up to £300 saved every month for a year. Lloyds and RBS customers receive 6.17 per cent on up to £5,000, but can only save up to £150 every month. Such accounts are not offered within an Isa wrapper.
Another trick is to prioritise longer-term savings in an Isa and easy-access savings outside of one. That way you can take advantage of the tax-wrapper now and lock into a long-term deal at top rate.
Also, if you put your money into a five-year fixed rate bond, you cannot touch it for five years. But, fixed-rate Isas are slightly more flexible.
You can close an Isa in an emergency under HMRC rules. You may be penalised, but at least you know you can access your money if you need to.
4. Save £58,000 tax-free as a family
Remember that everyone in your household has an Isa allowance, so make use of all of them.
Children have a Junior Isa allowance of up to £9,000, so a family of two adults and two children could save a combined £58,000 a year tax free.
Spouses cannot hold joint Isas, but one can gift the other money into their Isa.
Married couples and those in a civil partnership can also inherit Isas from each other tax free.
If they are passed on to anyone else, they form part of your estate for inheritance tax purposes.
Married couples who exceed their Isa allowances could also benefit from moving balances between them.
For example, if one of you is a higher and one a basic-rate taxpayer, it could really make sense for the basic-rate taxpayer to hold more of the taxable savings in their name.
That is because the basic-rate taxpayer has double the savings allowance (£1,000 versus £500) and is charged tax on interest at their income tax rate of 20 per cent versus 40 per cent for the higher-rate taxpayer.
5. Take advantage of Premium Bonds
Once you have maxed out your Isa and personal savings allowance, it may be time to consider Premium Bonds.
The prizes that are paid out by NS&I are tax free. Of course, they offer less reliable returns than a regular interest-paying account as there is a chance you will not win a penny.
But, if you’re otherwise facing a tax bill on your savings of 20, 40 or 45 per cent – depending on your income tax bracket – they may look very appealing.
The current prize rate is 4 per cent –although this may fall in the coming months – and the odds of winning are 22,000 to 1.
There are more than 5.8 million prizes in each monthly prize draw, including two £1 million prizes and over 1.8 million £25 prizes.
rachel.rickard@dailymail.co.uk
