The Chancellor’s decision to cut the cash ISA allowance from £20,000 to £12,000 is set to impact millions, says InvestEngine.
New analysis by the firm shows 7.1 million people saved into a cash ISA in 2022/23, with just over two million saving over the new £12,000 limit.
These two million savers will now face tax on interest once they exceed the Personal Savings Allowance, as any interest-earning additional savings would need to be placed in taxable accounts.
The Personal Savings Allowance is currently £1,000 for basic rate taxpayers and £500 for higher-rate taxpayers. However, with general savings rates currently sitting at around 4.5%, those thresholds will be exceeded quickly, the firm said.
Andrew Prosser, head of investments at InvestEngine, said: “Our analysis shows that almost one and a half million basic-rate taxpayers and just under half a million higher-rate taxpayers deposited more than £12,000 into their cash ISA in the last financial year; now that allowance has been cut down they will need to find somewhere else for this cash for anything over that amount.
“If they were to put that £8,000 – the difference between £20,000 and the new £12,000 limit – into a 4.5% savings account, after five years a basic rate taxpayer will have lost around £264 in tax, while a higher-rate taxpayer could lose around £1,216, or £234 a year once their total savings interest exceeds the £500 allowance.”
However, if a saver was to invest the same £8,000 into a stocks and shares ISA instead of a taxable savings account, they would be better off. A basic rate taxpayer could be £2,200 better off after five years, while a higher rate saver would be nearly £3,800 better off over the same period, according to the analysis.
Prosser added: “While the cut is undoubtedly a blow for those who were planning to save more than £12,000 into a cash ISA, now is a good opportunity for those who have not invested before to consider it as a way of reaching their financial goals.
“By shifting part of their allowance into a stocks and shares ISA, savers can preserve the tax benefits of the full £20,000 limit while giving their money a chance to benefit from inflation-beating growth.”
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