Savers have been urged to read up on sweeping new tax rules coming in from next year. The new HMRC regime includes the introduction of a 22 per cent tax on your cash. An expert says you may be able to avoid this by making a change to your account.
ISA allowance changes
As set out at the Autumn Budget, the Government is restricting the ISA allowances that savers enjoy. Under the current rules, you can put away up to £20,000 a year into these tax-free accounts, dividing your allowance however you want between cash ISAs and stocks and shares ISAs. But from April 2027, this will effectively be cut so you can only use £12,000 of the allowance however you want. The remaining £8,000 will only be available for deposits into investment-based accounts.
The new allowances will apply to people aged 65 and under. Those over this age will keep the current full £20,000 allowance. Andrew Prosser, from investment platform InvestEngine, encouraged people to plan ahead - but not to rush things.
Expert advice
He said: "The current ISA rules remain in place until April 2027, giving people plenty of time to consider their options. The most important thing for savers to do now is continue making the most of the allowances as they stand."
ISA savers under 65 who would normally pay more than £12,000 of new money into cash ISAs each year should start considering what they might do with the remainder of their £20,000 annual ISA allowance once the new rules take effect. You may be frustrated to hear the Government is restricting your options with the allowance cut, but Mr Prosser says this could be an opportune moment.
New tax for savers
He said: "For those who have not invested before, the rule change could be an opportunity to do so. A stocks and shares ISA will continue to offer savers tax advantages up to the full £20,000 allowance, and enables their money to potentially benefit from higher growth in the long term."
Investments typically grow your savings more than what you would get with an interest rate applied to your cash savings, over the long term. But it's important to be aware that the value of your holdings can go down as well as up.
One complexity to be aware of is there is a new 22 per cent tax coming in, also from April 2027, which will affect some ISA savers. Mr Prosser said: "One point to be aware of is the new flat-rate charge of 22 per cent on interest earned on cash held within a Stocks and Shares ISA. This is designed to stop people circumventing the £12,000 cash limit."
But there are ways around this. Mr Prosser said: "Instead, investments such as ETFs, which will not be subject to the tax, can provide a simple way for investors to gain diversified exposure to global markets without having to pick individual companies themselves."
ETFs (exchange-traded funds) are investment funds made up of a range of stocks or bonds. This allows you to invest in a wide range of markets or sectors through a single investment.
