Savers braced for fiveyear Isa allowance freeze

‘The party is being put on hold’, experts tell Harry Brennan

Savers will be hit with a five-year Isa allowance freeze after years of above-inflation growth in the savings limit, experts have warned. The Government has already announced the annual £20,000 allowance will be frozen for at least another year and sources at HM Treasury have now hinted it will stay there for the longer term.

It said the current Isa allowance was “generous” and “continued to benefit the majority of savers”.

Millions of Isa savers who max out their £ 20,000 Isa allowance every year will have to protect their newly accumulated lockdown savings from the tax authority in other ways.

More than four million people used their entire allowance in the 2017-18 tax year, a group that made up almost a fifth of all Isa savers, according to the latest official figures.

Holly Mackay, of finance site Boring Money, said a decade of increases was over and that the “Isa party was being put on hold”.

“As the Chancellor tightens his purse strings it is hard to see that these types of increases to Isa allowances will continue. Against the recent Budget backdrop of frozen allowances, the significant jump in allowances we have come to expect on an annual basis could be a thing of the past,” she said.

The limit has almost doubled over the past 10 years, from £10,200 in 2010-11. The savings allowance was massively expanded under former chancellor George Osborne in an effort to stop people hoarding cash and encourage them to invest in companies.

It has allowed individual savers to put up to £159,000 into Isas since then, £43,000 more than would have been possible had the allowance only risen with inflation. This is £ 56,000 more than would have been possible had the allowance not increased at all.

Even if it rises with the forecast rate of inflation, savers will only be able to save an additional £3,850 by 2025-26, a fraction of the increases seen in recent years.

It comes as households are saving larger sums of cash than normal after being stuck at home for months. Families saved £ 18.5bn in January alone, compared with a monthly average of £4.8bn in the six months to February 2020, Bank of England figures showed.

Telegraph Money has already reported a rise in families stashing cash away via their children through Junior Isas, suggestive of high levels of savings. Chancellor Rishi Sunak doubled the Junior Isa allowance to £9,000 last year, before the true economic impact of the crisis became clear.

George Bull, of tax firm RSM UK, said this recent and generous increase would make it easier for the Government to keep the main Isa allowance at its present level. “It would be easy enough to freeze it politically, as most people do not max out the allowance. It would be seen as a levelling up move, rather than a reward for wealthy savers, and would help further support the public finances,” he said.

It would also “match up” with the five-year freezes to the personal allowance for income tax, capital gains tax and inheritance tax, which have already been announced and are expected to raise £20bn by 2026, he added.

Ms Mackay said: “With an uncertain future environment and a cashstrapped Chancellor scanning the financial universe for some easy political wins, we should all make the most of these allowances each year.”

She encouraged savers who have cash and investments outside an Isa to consider transferring their holdings into the tax-free account.

The £20,000 limit has not risen since 2017. It would stand at £ 21,077 today had it gone up with inflation in the past three tax years. A government spokesman said: “We keep all aspects of savings tax under review and any changes are announced at fiscal events.

“The annual Isa limit increased by the largest amount ever in April 2017 and Isas now provide a generous relief that allows for tax free savings income of up to £20,000.”

The Treasury added the average annual amount saved into Isas in 201819 was £6,049, so the current Isa limit covered the majority of savers. The Junior Isa limits now stands at £9,000.