With the economy (and global politics) looking a little volatile, and while interest rates are comparatively high to the previous decade, it can feel safer to leave larger amounts of cash in savings. However, the impact of tax and inflation on returns can return a poorer outcome in the long run.
The government has now announced plans to introduce a 22% flat-rate tax charge on interest earned from uninvested cash held in non-cash ISAs – making cash look even less attractive. From April 2027, this new measure is designed to stop savers from bypassing new cash ISA limits.
As a recap, those aged 65 and under, will only be able to make a maximum deposit into a tax-free cash ISA of £12,000 per tax year. The remaining £8,000 of your £20,000 overall allowance must be invested elsewhere, such as a stocks and shares ISA.
In a move widely criticised by industry experts, the government is apparently trying to encourage more people to move money out of cash and into productive investing for the long-term.
While we are obviously in agreement about the performance of investments over cash, and have the historical data to prove it, there is an ongoing concern about these isolated, knee-jerk policies which often do more harm than good.
ISAs should be simple. They should encourage saving and investing and have always been called ‘tax-free’. Every change and tinker to the rules deters people from entering the market.
The new reforms amount to little more than a stealth tax on individuals who choose to hold a small amount of cash as part of a balanced, sensible approach to their investments. In our experience, clients are happy to talk through the limitations of cash but might need to hold sums temporarily when approaching life events or specific projects.
One must question whether these proposals are ever discussed with advisers or savers when they are in the planning stages. Sadly, savers face another needless change that will add complications for everyone and increased tax – and this is part of what the government has called ‘simplifying and modernising the tax system’.
