What it’s essential to do NOW to guard your nest egg from Labour’s tax seize: JEFF PRESTRIDGE reveals his methods to spice up your financial savings… earlier than the devastating raid

The run-up to the end of the tax year – April 5 – is always a crucial time to ensure long-term savings and investments are set up as tax-efficiently as possible.

Yet I suspect that, in the next few weeks, this seasonal flurry of good financial housekeeping will reach unprecedented levels.

Some of us will top up our pension contributions, utilise our annual capital gains tax allowance and make gifts to family and friends to mitigate inheritance tax bills further down the road.

And, of course, many (including my self) will use as much of our annual Individual Savings Account (Isa) allowance – £20,000 per adult, £9,000 for children – as finances permit to shield savings and investments from tax.

But how we use our annual Isa allowance this time – and the one in the new tax year starting April 6 – is more important than ever. As is the need to ensure the Isas we have under our wing still meet our goals: be it in providing a reliable source of top-up retirement income, a secure fund to pay for holidays or financial emergencies, or an investment portfolio to draw upon in the distant future.

This added importance is all because of Labour’s impending overhaul of this much-loved tax-friendly savings and investment vehicle, details of which were announced in last November’s Budget (disastrous Budget number two) by Chancellor of the Exchequer Rachel Reeves.

Although Labour’s Isa makeover – centred around getting more people to invest rather than to save – does not kick in until April next year, it simply cannot be ignored. Action NOW is the order of the day.

What is happening in April next year needs to be front and centre of your mind when making your Isa choices in the current tax year and the new one starting next month.

It should also frame the make-up of the Isas that you wish to have in place come next year when Labour will make it increasingly difficult for many of us to contribute to cash Isas.

Changes, for the record, which would have discriminated more harshly against cash savers if it wasn’t for Money Mail’s brilliant ‘Hands Off Our Cash Isas’ campaign.

Seismic changes, all the same, but please don’t be scared. This must-read eight-page guide is designed to help you prepare for, and navigate, the changes coming your way so that your Isa portfolio remains fit-for-purpose.

So where are we now?

Currently, adults can invest or save up to £20,000 per tax year into an Isa. For those with children, they can also fund a Junior Isa (Jisa) to the tune of £9,000 annually, assisted by contributions from grandparents, relatives, or generous family friends.

The deal is simple, although this will change for the worse come April next year when Labour’s Isa revamp comes into force.

For now, whatever sits inside your Isa is tax-free. So, if it’s cash, interest rolls up tax-free.

Similarly, if you use your Isa allowance to invest in stocks and shares, your plan grows free of tax. So, there is no tax on any capital gains you (hopefully) make from your investments sitting inside the Isa. Furthermore, any dividends you earn on the investments (be they funds or shares) are also tax-free.

In short, Isas are a compelling way to accumulate wealth – and judging by the £1trillion of savings and investments held in Isas by more than 20 million adults, the public (that’s you, dear readers) agrees.

Why? Because Isas are relatively straightforward which is unusual for any savings vehicle benefiting from tax breaks paid for by the public purse (think pensions and the headache inducing maze of rules now governing contributions, eligibility for tax relief and the amount of tax-free cash that can be taken).

For example, there are no rules governing how long an Isa needs to be held for – although stocks and shares Isas only really work if put in place for the long term. The exception is the Lifetime Isa (Lisa) which doubles up as a way for people to accumulate a home deposit or build a pension fund. Here, penalties for early non-eligible withdrawals are applied although Labour has said it will come up with a replacement for Lisa by April 2028.

Sadly, Isa simplicity will go out the window come April next year. But we’re here to help.

The compelling tax case

The case for Isas to form a key part of most people’s long-term finances has been give extra vim in recent years by the tax attack on savings and investments begun by the Conservatives and continued with avengeance by Labour.

This assault has resulted in a savaging of the annual tax-free allowance available on capital gains made from share or investment fund disposals. It has been cut from £12,300 (in the tax year ending April 2023) to the current £3,000.

To make matters worse for people with investment portfolios, Labour wacked up the charge rate on taxable capital gains for basic rate taxpayers from 10 to 18 per cent on the day of Reeves’s first Budget (30 October 2024). The equivalent rates for higher and additional rate taxpayers ratcheted up from 20 to 24 per cent.

If I was a betting man, I’d put a fiver on further hikes in capital gains tax before Labour’s term in office comes to an end in 2029.

Those who receive dividends on shareholdings have also been hit by a more pernicious tax regime. The annual tax-free dividend allowance has taken a severe haircut – from £1,000 in the tax year ending April 2024 to £500.

From the start of the new tax year, the tax charge on annual dividends above £500 will rise from 8.75 to 10.75 per cent for basic rate taxpayers – and from 33.75 to 35.75 per cent for higher rate taxpayers. Additional rate taxpayers will continue to pay 39.35 per cent.

Savers aren’t being let off either. From April 2027, they will see savings tax rates rise by two percentage points. This means basic, higher, and additional rate taxpayers will pay respective savings tax of 22, 42 and 47 per cent although basic and higher rate taxpayers will still enjoy an annual tax-free personal savings allowance of £1,000 and £500.

In a nutshell, dear readers, your savings and investments are being pillaged by tax thirsty Labour. The best way for you to protect your wealth from this pillaging is to tuck as much of it as you can inside an Isa.

So what Isa path to tread?

This tax year, the Isa options are the same as they were last year. This means those who don’t want to take any risk with their capital can still put £20,000 into a cash Isa.

Just under three quarters of all adults who have an Isa only hold a cash version.

Others, with long-term investment horizons, will be best using their allowance to invest in a stocks and shares Isa – while some may prefer splitting their money across a cash Isa and a stocks and shares Isa.

These same options also apply for the new tax year beginning April 6. But from April 2027, Labour’s rule changes kick in.

Then, only the over 65s will be able to use their full £20,000 annual allowance to fund a cash Isa. For all other adults, an annual cap of £12,000 will be imposed on deposits into cash Isas.

To make maximum use of their allowance, the under 65s will have to invest – although they will be able to contribute to both a cash Isa and stocks and shares Isa.

Labour’s prioritisation of investing over saving is being sold to us on the basis that it will be good for both the country (boosting economic growth) and our long-term wealth (shares deliver better returns than cash).

I get that, but not everyone wants to risk their Isa money in the stock market.

If you sit in that camp, I urge you to use as much of your £40,000 cash Isa allowance available across this tax year and next. By doing this, you will build yourself a bigger savings bunker 100 per cent protected from tax.

Personally, I have a long-standing stocks and shares Isa, but I have used this year’s allowance to put £20,000 into a cash Isa with my ‘bank’ Nationwide. I will do the same again once the new tax year starts on April 6 as I strive to reduce the tax bill on my modest cash savings.

But making the most of the £20,000 cash Isa allowance this tax year and next isn’t the only action available to those who want a ‘risk-free’ Isa journey (risk-free in terms of capital, not necessarily risk-free from the erosive impact of inflation).

From April 2027, you will no longer be able to transfer Isa money from a stocks and shares Isa to a cash Isa. Such transfers are often made by people as they edge towards retirement and wish to de-risk their wealth.

This means that those who are thinking about making such a de-risking transfer should do so well ahead of April next year. Not all cash Isa providers accept transfers from stocks and shares, but those that do will carry out the work necessary for the money to come across.

If you fit into this camp, do the transfer now or put a reminder note in your diary to take such action early next year. Failure to do so will mean you either end up with a stocks and shares Isa you no longer want – or if you get rid of it probably moving the proceeds into taxable savings accounts. A transfer from a stocks and shares Isa to a cash Isa ensures the tax-free wrapper remains intact.

One other consequence of Labour’s Isa changes will be a clampdown on cash held inside a stocks and shares Isa. This cash may result from shares or funds you sell within the tax-wrapper and don’t reinvest immediately – or from payments you’ve made into the Isa pending investment. It may also be held because you have sold your investments in anticipation of a stock market correction.

Although Labour is still contemplating how to stop holders of stocks and shares Isas using them as surrogate cash Isas, it looks likely that a tax charge will be imposed on any cash holdings.

Crazy? Yes. And the first small crack in Isa’s status as a tax-free wrapper. But that’s Labour for you. Anti-saving and anti-investing.

Some final Isa thoughts

In the coming weeks – and definitely before April 5 – I urge you to take a step back and review your existing Isas. Are they still on course to meeting your financial goals?

So, if you have cash Isas, are they paying a competitive rate of interest – or could you get a better deal by transferring them to another provider?

If you have a stocks and shares Isa, are the underlying assets delivering the investment gains and income you expected? If not, freshen things up. Look at investment ideas given by the platform you invest in.

Also, is your stocks and shares Isa provider offering you a fair deal when it comes to charges? You might be able to transfer to a lower cost operator.

In light of the changes coming down the road in April next year, have you got the right balance between cash Isas and stocks and shares Isas?

If not, now is the time to consider transferring a stocks and shares Isa to a cash Isa.

And crucially, have you, your spouse or civil partner used as much of the £20,000 annual Isa allowance available this tax year as possible? If you’ve got savings in bank and building society accounts, move the money into cash Isas – and if you hold shares outside a stock and shares Isa, think about selling some of them and buying them back inside your Isa (your Isa provider will do all the work).

And don’t forget about funding Junior Isas for your children (£9,000 per tax year) or grandchildren. They’ll love you to death when they hit age 18 and have a nice lump sum in their proverbial back pocket.

Finally, finally, come 6 April, start funding your next Isa. Procrastination does not pay. The earlier you save into a cash Isa, the more tax-free interest you earn – and the quicker you invest, the more chance you give your stocks and shares Isa of growing.

Happy Isa hunting.

Do you have an Isa question you would like our experts to answer? Email us at [email protected]