Savers in the UK are facing the prospect of the ISA allowance freezing for up to five years. This is according to the Telegraph, whose sources at the Treasury have indicated that there are no plans to raise the annual £20,000 limit in the near future.
So, why might the government freeze the allowance, and what might this mean for savers? Let’s find out.
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What is an ISA?
An ISA, or individual savings account, is a type of savings account where you don’t pay any tax on interest.
There are six different types of ISA:
- Cash ISA
- Stocks and shares ISA
- Help to buy ISA
- Lifetime ISA
- Innovative finance ISA
- Junior ISA
What is the ISA allowance?
This is essentially the total amount you can save into an ISA each year to benefit from the tax break. The current annual ISA allowance is £20,000.
Could the ISA allowance be frozen for five years?
The annual ISA allowance has risen gradually since the introduction of ISAs in 1999. The first-ever allowance was £7,000. For more information on this, check out our article on historical ISA allowances.
Prior to 2017, the year the ISA allowance hit £20,000, it used to rise with inflation every year. However, it has remained at £20,000 ever since. If it had gone up with inflation like before, it would currently be at £21,077.
The government has already announced that the annual allowance of £20,000 will be frozen for at least another year. It stated that the allowance is the most generous it has ever been and that it will continue to benefit the vast majority of savers.
And now, according to the Telegraph, sources at HM Treasury have hinted that it might remain at the same level until 2026.
Apparently, most people do not even max out their existing £20,000 ISA allowance. So freezing it might be seen as an equaliser, instead of a reward for wealthy savers. The freeze could also help support public finances.
Has the ISA allowance been frozen on all types of ISA?
No. While the main ISA allowance has not changed since 2017, the Junior ISA allowance was doubled last year to £9,000. Many people are already taking advantage of this opportunity to stash away more of their money through their children.
In fact, the Telegraph says that the generous increase of the Junior ISA allowance could allow the government to keep the main ISA allowance at its current level of £20,000.
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What does this mean for savers?
The ISA allowance freeze comes as households continue to save significantly more money than usual as a result of being confined to their homes due to lockdown.
The implication is that savers may need to seek alternative methods to shield their lockdown savings from the taxman. Unfortunately, there aren’t many options.
Consequently, it is perhaps more important than ever to make sure you’ve used up your entire allowance in order to maximise your tax savings.
Remember that if you do not use up your full £20,000 annual ISA allowance by 5 April 2021, which is when the ISA season resets, you’ll lose it for good.
Why invest through an ISA?
The tax advantages of ISAs cannot be overstated.
These advantages are even more powerful if you invest through an investment ISA (i.e. a stocks and shares ISA). That is because you won’t pay tax on any growth in your investment or on any income that your investment might generate.
That means:
- Zero capital gains tax on profits from rises in share prices
- No tax on interest earned from bonds
- No tax on any income from dividends
Keep in mind, however, that tax rules can change and that tax treatment depends on your individual circumstances.
Interest rates on cash ISAs and ordinary savings accounts are currently at historic lows. Investing in a stocks and shares ISA might be a better way to ensure that your money is working as hard as possible for you.
If you are wondering how to get started, then take a look at our comparison of top-rated stocks and shares ISAs.
Remember that the stock market is inherently risky, so make sure that you do your homework before you invest.
