UPDATE: Major changes to the tax-free allowance for Individual Savings Accounts (ISAs) are set to hit savers hard, decreasing from £20,000 to £12,000 by 2027. Financial experts are urging immediate action to protect your savings from unnecessary tax burdens as the deadline approaches.
Matthew Jenkin from consumer watchdog Which? warns that individuals could face hefty tax hits on the interest earned on their savings. With the current tax-free interest limit set at £1,000 for basic-rate taxpayers and £500 for higher-rate taxpayers, those with substantial savings must strategize to avoid significant tax liabilities.
“Basic-rate taxpayers can currently earn up to £1,000 in interest tax-free,” Jenkin explains. “However, a large sum in savings can quickly lead to tax implications if not managed correctly.” He emphasizes the importance of utilizing the full ISA allowance before the reduction takes effect, which would require a portion to be allocated to a stocks and shares ISA.
The urgency amplifies due to Chancellor Rachel Reeves’s recent decision to extend the income tax threshold freeze, which could trap many savers in higher tax brackets due to inflation. For the 2025/26 tax year, the standard Personal Allowance remains at £12,570, with escalating tax rates applicable to earnings above that amount.
Savers must act now. Those earning between £12,500 and £50,000 could exceed the personal savings allowance ceiling if they do not invest wisely. Jenkin warns, “If you are paying tax, any interest exceeding your available allowance could lead to a tax liability.”
For example, current easy-access accounts offer around 5% interest. To earn £1,000 in interest, one would need to save approximately £20,000. “If you’re a basic-rate taxpayer with £20,000 or less, it’s unlikely your interest will be taxed. But if you’re a higher-rate taxpayer, only £500 of interest remains tax-free,” says savings expert Martin Lewis.
In light of this, Jenkin cautions against limiting savings strategies to high street banks, which often provide lower interest rates, potentially missing out on higher returns from smaller, digital banks. He highlights a significant disparity: a typical high street account offering an AER of 1.15% would yield just £115 in interest on £10,000, whereas a top account could yield £448 at 4.48% AER, a staggering difference of over £300 annually.
To safeguard your funds, ensure that any bank or platform is covered under the Financial Services Compensation Scheme (FSCS), which protects up to £120,000 per depositor in the event of a bank collapse. Not all smaller banks may offer this coverage, so it’s crucial to conduct thorough checks.
With the clock ticking down to 2027, experts stress the importance of revisiting your savings strategy now to maximize tax efficiency and protect your nest egg from future tax liabilities. Don’t wait until it’s too late—take proactive steps to ensure your financial future is secure.
Stay tuned for more updates as this situation develops, and share this information to help others prepare for the looming changes!
