Relief for millions of savers as Rachel Reeves dodges huge change to ISA rules in Spring Statement
MILLIONS of savers can breathe a sigh of relief as Rachel Reeves opted against making major changes to ISA rules in the Spring Statement.
Each year, individuals can deposit up to £20,000 into an individual savings account (ISA), with any returns – regardless of the amount – remaining entirely tax-free.
There had been speculation that the allowance for those choosing to save in a cash ISA, the most popular type of account, could have been slashed to £4,000.
However, this reduction has not materialised, and the maximum amount you can save into a cash ISA remains unchanged.
Key announcements in the Spring Statement:
- No new tax rises: The Chancellor ruled out further tax hikes and pledged to crack down on tax avoidance, aiming to raise an extra £1bn.
- Growth downgraded for 2025: The OBR halved its GDP growth forecast for next year from 2% to just 1%.
- Growth boost from planning reforms: New housing policies expected to raise GDP by 0.6 per cent over the next decade.
- Housebuilding surge: 1.3 million homes expected over five years, with construction hitting a 40-year high.
- £2.2bn extra for defence: Additional funding confirmed to help meet the 2.5 per cent of GDP defence target.
- £400m Defence Innovation Fund: Backing new tech like drones and AI for the front line.
- Welfare shake-up: Targeted employment support and welfare reform to reduce benefit spending.
- Civil service cuts: New voluntary exit schemes and AI tools to shrink Government.
Cash ISAs remain the most popular tax-free savings product, functioning much like a standard savings account, where your funds are held as cash.
They are considered less risky than stocks and shares ISAs, as your capital is not exposed to market volatility – ensuring you will always receive back at least what you initially deposited.
As with all ISAs, any income or gains you make from them are shielded from tax.
This is different to regular savings accounts, where you are taxed on income earned from interest once you breach a certain limit – known as the personal savings allowance (PSA).
Basic rate taxpayers are required to pay tax on their savings once their annual interest exceeds £1,000, whereas higher-rate taxpayers become liable as soon as they earn more than £500 in interest.
Anyone who is an additional rate taxpayer (taxed at 45%) has to pay tax on any interest they earn and gets no allowance at all.
TYPES OF ISAs
SAVERS can put away £20,000 a year into individual savings accounts, also known as ISAs, and any income or gains you make from them are shielded from tax.
This is different to regular savings accounts, where you are taxed on income earned from interest once you breach a certain limit – known as the personal savings allowance (PSA).
Basic rate taxpayers have a PSA of £1,000 while higher rate taxpayers get £500.
Anyone who is an additional rate taxpayer (taxed at 45%) has to pay tax on any interest they earn and gets no allowance at all.
You can split your £20,000 ISA limit between multiple ISAs, whether that’s a cash or stocks and shares ISA (we explain the different types below).
You don’t have to save the full £20,000 a year either.
There are several different types of accounts:
- Cash ISAs: A savings account where interest is earned tax-free. Suitable for risk-averse savers.
- Stocks and Shares ISAs: Invest in shares, bonds, and funds with potential for higher returns, but also higher risk. Gains are tax-free.
- Lifetime ISAs: Save up to £4,000 a year towards your first home or retirement, with a 25% government bonus on contributions.
- Junior ISAs: Tax-free savings accounts for children under 18. Available as cash or stocks and shares ISAs, with a yearly contribution limit.
- Innovative Finance ISAs (IFISAs): Invest in peer-to-peer lending with tax-free interest. Higher risk but potential for higher returns.
Should I save into an ISA?
Whether saving into an ISA is the right option depends on how much money you have to save, as well as your income tax threshold.
Basic rate taxpayers can earn up to £1,000 interest tax-free a year, while higher rate taxpayers get £500 a year tax free.
If you think you will earn more interest than your tax-free allowance, then an ISA will protect you from paying income tax on interest from that account.
On current rates, a basic rate taxpayer would need to have savings of more than £21,000 a year to exceed their personal savings allowance and become liable for tax on interest.
So if you have less than this then focus on finding the best rate and do not worry about whether it is an ISA or not.
If you have more than this then you should put your cash in an ISA.
What is the Spring Statement?
By Ryan Sabey, Deputy Political Editor:
Rachel Reeves is delivering the Spring Statement – nearly fifty years after the first such “mini-Budget” was delivered.
The statement, which over the years has been delivered in both autumn and Spring, was started in 1976 at the end of the year.
The law changed in 1975 to ensure there were two economic forecasts every year as opposition MPs and the public could keep track of government plans.
Rachel Reeves has insisted there will only be one major fiscal event each year with a Budget planned for the autumn – so no tax hikes or reductions this year.
Her Labour predecessor Gordon Brown held the Budget in the the autumn and each autumn he would deliver a Pre-Budget Report giving an update on the state of the country’s finances.
Fast forward to 2010 and George Osborne, Chancellor until 2016, set up the Office for Budget Responsibility, to provide an independent forecast.
They were also there to dissect the state of the economy – producing five-year forecasts twice a year.
But the OBR weren’t asked for a forecast by short-lived Prime Minister Liz Truss in 2022 despite their mini-Budget containing an array of tax cuts causing a market meltdown.
What should I do with money already in a cash ISA?
Industry data shows that there is approximately £54billion sitting in ISAs paying less than 2.0 per cent.
Derek Sprawling, director of savings at Paragon Bank, said: “Positively, that represents only 15% of total cash ISA balances, but with inflation rising we would urge any saver to help their money reach its full potential and move it to better paying options.”
As a benchmark, you’ll want to consider any account that currently pays more interest than the current level of inflation – 3%.
To find the best rates on offer visit price comparison websites such as Moneyfactscompare.co.uk and MoneySupermarket.
These will help you save you time and show you the best rates available.
They also let you tailor your searches to an account type that suits you.
It’s always wise to have some money stashed inside an easy access savings account to ensure you have quick access to cash to deal with any emergencies like a boiler repair, for example.
If you’re saving for a long-term goal, then consider locking some of your savings inside a fixed bond
And remember, if you still have any remaining allowance for this tax year, it’s worth considering transferring some or all of your savings into a cash ISA before the April 5 deadline to maximise the tax-efficient benefits.
Transferring your cash ISA to a new provider is generally straightforward.
Your new ISA provider will handle the entire process.
Check with both your current and new providers about any potential transfer fees or penalties.
Once you’ve chosen a new ISA, apply for it with the new provider.
Cash ISA transfers usually take up to 15 working days. However, it can sometimes take longer, so it’s best to allow up to 30 days.
If you are looking to save money over the long term, a stocks and shares ISA could offer greater returns.
Your money could go down though.
Over the past 12 months, the average returns on such products increased by 11.86%, compared to 3.27% for the average cash ISA, according to moneyfactscompare.co.uk.
Find out more at moneyhelper.org.uk/en/savings/investing/stocks-and-shares-isas.
FINDING THE BEST SAVINGS RATES
WITH your current savings rates in mind, don't waste time looking at individual banking sites to compare rates - it'll take you an eternity.
Research price comparison websites such as MoneyFactsCompare.co.uk and MoneySupermarket.
These will help you save you time and show you the best rates available.
They also let you tailor your searches to an account type that suits you.
As a benchmark, you’ll want to consider any account that currently pays more interest than the current level of inflation – 2%.
It’s always wise to have some money stashed inside an easy-access savings account to ensure you have quick access to cash to deal with any emergencies like a boiler repair, for example.
If you’re saving for a long-term goal, then consider locking some of your savings inside a fixed bond, as these usually come with the highest savings rates.