The Government recently announced changes to the ISA allowance
ISA savers have been urged to check over their savings to make sure they aren’t losing out on significantly better returns. A major benefit of ISAs is that they’re completely tax-free, which means you won’t pay any tax on interest earned or investment gains within these accounts. Currently, you can put up to £20,000 into these accounts each tax year while maintaining their tax-free benefits.
It’s important to consider how you’ll utilise this allowance, particularly as Labour revealed in the Autumn Budget that key changes will take effect from the tax year beginning April 2027. Starting from this financial year, savers under 65 will only be permitted to use up to £12,000 of this allowance for deposits into cash accounts or stocks and shares accounts. The remaining £8,000 allowance will exclusively be available for stocks and shares ISAs.
Laura Purkess, personal finance expert at Investing Insiders, highlighted to savers that the £20,000 allowance is dropping in actual value. She cautioned: “Over the past few years, inflation has risen considerably, peaking at around 11.1 percent in October 2022, and wages have also risen considerably to keep pace.
“Yet, like many thresholds, the ISA allowance has been frozen at its current limit since 2017 and will remain fixed until 2030/31. This means the amount you can shield from tax in an ISA is effectively shrinking in real terms, and as wages rise, more people will hit the limit faster. Ideally, the ISA allowance would be increased with inflation to maintain its real value.”
Getting the most out of your ISAs
The savings expert shared a straightforward tip to ensure your ISAs are delivering optimal performance. She said: “To get the most out of your ISA, the number one tip is to make sure you’re in the top-paying accounts on the market and that you are using the account most suitable for you.
“For cash ISAs, don’t give into inertia – switch to the top rate, as doing so could boost your savings by thousands of pounds long-term.” She also cautioned against a common error that can unnecessarily deplete your allowance.
Ms Purkess explained: “Don’t take your cash out of your ISA to switch – you can transfer your ISA directly so that transferring won’t affect your annual allowance.” She also said it’s worth checking you’re not being charged excessive fees for a stocks and shares ISA, which can erode your returns.
The team at investing app Kaldi also urged savers to make sure they are getting the most out of their ISAs. Mark Burges Watson, co-founder of Kaldi, explained: “The most important habit is understanding real returns.
“If a cash ISA pays less than inflation, savings are going backwards even if the balance looks stable. Investing early and regularly matters far more than timing the market.
“Automating contributions makes a huge difference, particularly for people who struggle to find spare cash.” The group worked out that by setting aside a mere £3 a day from the age of 20 to 70, your savings could potentially grow to between £560,698 and £2,291,845, even after deducting fees.
This is an impressive return considering you would only have contributed £54,750 over the half-century period. Kaldi is a handy app that allows you to earn cashback from your shopping, with the app available at more than 130 UK retailers.
The cashback you earn can then be channelled into an investment-based ISA or junior ISA, as well as into other types of investments.
