British savers are being warned they could face a surprise tax bill of up to £200, even if the Chancellor avoids a direct income tax hike in the upcoming Autumn Budget.
The Hidden Threat of Frozen Tax Thresholds
While speculation had suggested Labour might increase income tax in the Autumn Statement on November 26, the greater danger for many may lie in the existing policy of frozen tax thresholds. According to Jeremy Cox, head of Strategy at Coventry Building Society, retired individuals on fixed incomes might feel temporary relief if rates remain unchanged.
However, he cautions that if income tax thresholds remain frozen and allowances for cash ISAs are reduced, a significant number of people will inadvertently pay more tax on their cash savings. The current annual ISA allowance stands at £20,000, providing a vital tax-free shelter for interest and investment growth.
Potential ISA Reforms and Their Impact
Rumours are circulating that Chancellor Rachel Reeves could introduce a drastic cap on cash ISA savings, potentially slashing the limit to just £4,000. The stated aim would be to incentivise more investment in the economy.
Mr Cox highlighted that even before any new Budget measures, many are already on course to become higher-rate taxpayers next year due to the frozen thresholds. This shift has a direct and costly impact on savings income.
Basic rate taxpayers currently enjoy a £1,000 tax-free savings allowance on interest earned outside of an ISA. For higher rate taxpayers, this allowance is halved to just £500. This change could result in an extra £200 tax bill for savers earning £1,000 or more in interest.
Expert Advice: Don't Panic, Prepare
Derence Lee, chief finance officer at ISA provider Shepherds Friendly, urges savers to avoid rash decisions based on speculation. He recommends staying informed and conducting a thorough review of your current savings, pensions, and investments to understand their tax efficiency.
"Frozen thresholds may result in some individuals paying higher rates of tax, but the impact will vary depending on individual circumstances," Mr Lee stated. He advises waiting for the official Budget announcement on November 26, taking time to digest the details, and consulting a financial advisor before making any major financial moves.
Mr Lee also indicated that other areas, such as capital gains tax, inheritance tax, and pension reliefs, could be under review as the Chancellor seeks to manage public finances and stimulate economic growth.
