Savers are being hit with a ‘triple blow’ say experts (Image: Getty)
Households with savings face a ‘triple blow’ in the next 12 months say financial experts after a cut to Cash ISAs and a freeze on the tax-free Personal Savings Allowance – while tax rates for savings have been increased.
People with savings will be forced to see ‘more of their money taxed at higher rates’, says AJ Bell’s director of personal finance, Laura Suter.
She told the Express: “The decision to cut the Cash ISA allowance for those under the age of 65 is going to lead to bigger tax bills for the nation. While the government is hoping the move is going to nudge more people into taking their first steps into investing, in reality many people will just leave their money in non-ISA accounts and so pay tax on their savings interest.
“The Budget also saw the personal savings allowance frozen for another year and the tax rates for savings interest increased – leading to a triple blow for cash savers. Quite simply, they will see more of their money taxed at higher rates.”
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In the recent Budget, Chancellor Rachel Reeves announced a cut to Cash ISA limits which means that from April 2027, savers will only be able to deposit £12,000 tax-free rather than £20,000, unless they are over 65.
At the same time, the Personal Savings Allowance has been frozen at £1,000 for a basic rate taxpayer instead of being increased in line with inflation this April, while tax on savings interest will increase by two percentage points from 20% to 22% and 40% to 42% from April 2027.
Those looking to beat the tax hikes should ‘look at other options’ before next April, Ms Suter says.
She added: “Savers looking down the barrel of a tax bill for their cash savings can look at other options to generate a return on their money before the April 2027 deadline hits. While the default may seem like a non-ISA cash savings account, there are other options to consider that could pay off in the long run.”
“In our survey, a quarter of people said that if the Cash ISA allowance was cut they would buy Premium Bonds or another NS&I product. The appeal of Premium Bonds has just increased dramatically for some people, as any winnings are tax-free. While there is obviously the chance you could win nothing, as there is no traditional interest paid on the accounts, you could win in the prize draw and those winnings will be tax-free.”
She also added that savers should consider turning to investments, which usually make a lot more money than cash savings in the long run.
Ms Suter added: “While the ISA allowance will be slashed for cash, it will remain at the full £20,000 for investments. We know that we’re a nation of cash lovers, and many people have more cash than they need. FCA data shows that since 2021 the number of people holding more than £10,000 in investible assets wholly or mainly in cash has risen from 8.4 million to 11.8 million.
“But savers should at least consider investing, to see if it’s right for them. Recent research from AJ Bell found that investing £1,000 each year since 1999 in the average IA Global sector would now be worth £92,349 versus just £36,290 in the average Cash ISA – a difference of £56,059. So those sticking to cash could be leaving themselves much poorer over the long term.”
Finally, savers can use ‘tactical’ fixed term savings accounts.
She said: “Fixed rate savings accounts can earn you higher interest, you just have to be willing to lock your money up for longer. You can choose the length depending on your needs, from one year up to five years or more. But it’s a good way to lock in a higher return than easy-access cash. The money will still be taxable if it’s not in an ISA, but you could be tactical with the accounts you choose.
“You only pay tax on the interest for most fixed-rate accounts at the end of the term, which means you could defer the tax hit to another tax year. For example, if you took out a one-year fixed rate account now, that paid out the interest at maturity, that would only factor into your 2026/27 tax year. It’s a smart move if you know you’re going to drop to a lower income tax bracket in a future year, which means you’d have a higher personal savings allowance and pay a lower tax rate on your savings. Equally it can be a good move if you’ve got lots of taxable savings this year, and so have already hit your tax-free limit, but may have less next year. It’s a good idea to track the savings accounts on a spreadsheet, so you don’t lose track of when they mature, or use a cash savings hub, so they are all in one place.”