The budget may not have had the terrifying income tax rate rises many of us feared, but there are tax increases hidden in the details. Some could have a big impact on the return you enjoy from your savings.
At Continuum we are looking at just what these increases are, and what you can do to help minimise their impact.
What has changed?
Rachel Reeves’ approach could be interpreted as aiming to increase tax revenues in a less direct manner, or as seeking to reduce incentives for saving
Her November budget had two measures which could eat into saver’s returns.
The first will affect those of us saving outside an ISA. The savings allowances will remain their current levels, but as soon as you go past them, the tax you pay on your interest will increase.
The tax rate on savings interest (and rental income from property) will rise to 22% for basic-rate taxpayers, 42% for higher-rate taxpayers and 47% for additional-rate taxpayers from April 2027.
ISA savers will also be hit. The actual tax position on ISAs has not changed, and and ISAs will remain tax efficient – but the amount you can save into a Cash ISA will be cut from £20,000 to £12,000 for under-65s from April 2027. The stated intention may be to encourage savers to switch to investment via a Stocks and Shares ISA. The actual effect may be to push more of savers funds into taxable savings accounts.
From April 2027 the amount you can save tax-free into a Cash ISA will be cut from £20,000 to £12,000 for under-65s while the tax on savings interest will rise by 2%.
You may need to adjust your long-term savings plan and there are some changes worth considering immediately
So what can you do?
The new measures are still more than 16 months away, allowing some time to help get organised and minimise the effects on your finances.
Pump up your Cash ISA. You have until April 2026 to use this year’s ISA allowance and a full allowance for 2026-27. This means you can still save up to £40,000 into a Cash ISA, or up to £80,000 as a couple before the restrictions kick in.
Consider using both allowances in time or you’ll lose them you cannot carry over what you don’t use. What you can do is to transfer old ISAs into new accounts that may offer more competitive rates.
Boost your savings. Cash ISAs usually offer slightly lower rates than many standard savings accounts. So, if your savings are not yet large enough to breach the savings allowance threshold, you may be able to maximise returns by shopping around for the top paying account. Balancing your savings inside and outside an ISA may be tricky, but it could help you maximise your overall returns.
Save as a couple. Married couples can also consider shifting savings into the name of the lower earner, or to the one who has not used up their savings allowance.
Save for you children. The £9,000 annual Junior ISA allowance has not been affected. You can open a Cash Junior ISA as parents or guardians for those aged under 18. The child can manage the money at 16 and withdraw it at 18.
Invest in cash
If you want to use your ISA entitlement after 2027 but don’t want the uncertainty of stocks and shares, there are some ways to do it. You could simply open an investment ISA and leave the cash on deposit, without actually buying any funds or shares. Many investment accounts pay interest on uninvested cash, although rates may be lower than a Cash ISA, and the government is said to be looking at financial penalties to discourage it – even though that sails close to a tax on ISA investment.
A potentially more rewarding solution might be to invest through a Stocks and Shares ISA into money market funds. These are usually very low-risk, and hold money in cash, or in short-term bonds issued by governments or large companies such as banks.
How Continuum can help
You could of course simply take the plunge and become an investor. Investing through a Stocks and Shares ISA in a fund managed for low-risk returns can be as simple as saving, and in practice means very little risk. However, if you want to stay in cash, at Continuum we can help.
We can review a range of ISAs and savings accounts- benchmark your existing accounts and help you build a savings strategy that will maximise returns and minimise tax.
To start saving your savings, call us today.
This article is intended for general guidance only and is based on the opinion of Continuum it does not constitute financial advice. Individual circumstances vary, and you should consider seeking advice from a regulated financial adviser before making any decisions about your savings or investments.
The Financial Conduct Authority does not regulate taxation advice or deposit accounts.
The value of an investment can go down as well as up and you may get back less than you invested. When investing Capital is at risk.
Investors in ISAs do not pay any personal tax on income or gains. Levels and basis of reliefs from taxation are subject to change and their value depends upon your personal circumstances.
Investments do not include the same security of capital which is afforded with a deposit account.
