THERE are strong rumours afoot that the UK Government is planning to cut the tax-free allowance on cash ISAs as part of its Spring Statement.
At the moment, adults can contribute as much £20,000 to cash ISAs each year if they wish to, and the interest on this is currently tax-free.
But that could be about to change. Here’s what reported plans to change the cash ISA limit could mean for you:
What could change about ISAs?
The main two types of ISA are the cash ISA and the stocks and shares ISA, and currently the most an individual can save in these accounts is £20,000 each tax year. Consumers can spread their money between multiple ISAs or just pay into one.
More than 18 million people have a cash ISA, and there is almost £300 billion sitting in them.
According to reports, industry figures have urged the Government to limit ISAs only to investments – via a “Stocks and Shares ISA” – thereby ending Cash ISAs.
A report in the Financial Times suggested the idea had been put to Chancellor Rachel Reeves during a meeting with representatives from the investment industry, who argued the change would help to reinvigorate the UK’s capital markets.
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The most heavily rumoured plan though at the moment is that the Government is looking to cut the tax-free allowance to £4000.
With the best cash ISA interest rates currently at 5%, research shows savers could lose up to £5132 in interest to tax over a five-year period if this happens.
There have also been some reports the tax-free allowance could be scrapped altogether.
We will ultimately have to wait until the Spring Statement on March 26 to see what the Government settle on.
How will it affect people?
In a poll by Nottingham Building Society of 2000 cash ISA savers, a fifth (20%) said it would affect their ability to put down a deposit for a house, rising to two fifths (41%) among 25-34-year-olds.
Meanwhile, 36% of respondents said it would negatively impact their ability to build an emergency fund.
Nottingham Building Society is also sceptical over whether a cut in the cash ISA rate will incentivise savers to use a stocks and shares option. Just 38% of those surveyed said they would consider putting more in a stocks and shares ISA instead of a cash ISA while one in three cash ISA holders (an estimated 2.5 million people) said they would save less.
Cash ISAs are also key source of funding for banks and building societies, which use the deposits to fund loans to households and businesses. Nationwide, Britain’s biggest building society, said that any attempt to cut tax breaks on cash ISAs would reduce the availability of mortgages for first-time buyers.
Pros and cons of ISAs
Higher interest rates have made cash ISAs more attractive in recent years as savers get the security of fixed return and it is tax-free, but they could lose their appeal as interest rates drop.
Even without an ISA, savers benefit from a personal savings allowance at £1000 per year for basic rate taxpayers and £500 for higher earners.
Research by Quilter suggests many savers are losing money in real terms by keeping funds in a cash ISA. Someone who invested £10,000 in a cash ISA in December 2012 would currently have £11,955. Adjusted for inflation, this is just £7918, according to research by the wealth manager.
ISAs would almost certainly become more unpopular if the rumoured plans to cut the tax-free allowance happened.
