With Rachel Reeves now given the keys to Dorneywood, the 21-room Buckinghamshire mansion occupied by Deputy First Minister John Prescott during the previous Labour government, it is perhaps the strongest signal yet that the Treasury’s responsibility extends beyond that of Deputy First Minister Angela Rayner.
Reeves is expected to implement Sir Keir Starmer’s warning in her first budget next month that those with the “broadest shoulders” will bear the heaviest brunt of tax rises.
Left-wing think tanks have advised Reeves to raid pension savings and take a huge chunk of our children’s inheritances. And experts say Individual Savings Accounts (ISAs) could also be in the Treasury’s sights.
Chancellor Rachel Reeves will raise taxes in her first budget on October 30
Here we reveal how the Chancellor could be plundering ISAs – and what you need to do NOW to protect your savings.
Why would Reeves target Isas?
ISAs allow you to save or invest up to £20,000 a year without paying a penny of tax on the interest, returns or capital gains.
Offering such generous tax breaks doesn’t come cheap.
The Resolution Foundation estimates that the tax relief provided through Isas will “cost” the Treasury a whopping £6.7 billion in taxes it could otherwise have collected in 2023-24, compared with £4.9 billion in 2022-23.
The increase is largely due to higher savings rates.
According to government figures, there is now almost £750 billion in cash, stocks and bonds accounts in the UK, with more than 22 million adults holding some of their savings in tax-free accounts.
ISAs are available to people of all incomes and wealth levels. However, a small minority of people with significant wealth can benefit most and shelter large sums from tax.
The Labour Party could look at this group and ask whether the state really needs to offer the current level of tax breaks to encourage people to save.
The signs that the government is considering tax-free savings accounts are ominous.
Labour earlier this month scrapped plans that would have allowed savers to invest an additional £5,000 in a UK Isa, which would invest exclusively in British companies.
This was a conservative policy outlined before the election.
“In 2020/21, there were almost four million people with an Isa worth more than £50,000,” says Sean McCann, accredited financial planner at NFU Mutual.
‘The government could choose to limit the amount individuals can hold in Isas or reduce the £20,000 annual Isa exemption to reduce those costs.’
How can Isa be watered down?
Economists at the Resolution Foundation have called for an individual Isa limit of £100,000. Anyone who reaches this level would no longer be able to add to their Isas.
Alternatively, the annual limit of £20,000 could be lowered – and the government could say that only the wealthiest savers would be affected. The Resolution Foundation says that £20,000 is more than four times the median level of total savings – including current accounts and other savings products – per adult.
By this measure, adults have an average of around £4,700 in savings.
Another possibility is that the current £20,000 limit could remain at the same level for years to come, with its value gradually decreasing due to inflation.
The threshold has been at £20,000 for seven years, since 2017. If the threshold had been raised with inflation, it would now be above £25,000.
How likely are changes to the ISAs?
Ed Monk, deputy chief executive of Fidelity International, does not expect any major changes to the Isa rules next month.
ISAs are popular financial products and are used by most households to increase their savings. Making them less valuable would actually discourage saving.
However, experts believe that other tax adjustments in the budget could make ISAs even more attractive.
For example, if Finance Minister Rachel Reeves raises capital gains tax rates in the budget, it becomes more valuable to be able to invest without paying tax.
“If the tax treatment of pensions changes, it could also limit people’s options for saving in a tax-efficient way for the long term,” Monk said.
‘Changes in both areas would only make it more important to maximise the Isa allowance where possible.’ It could also make Isa’s a more likely target in future budgets as their popularity grows.
ISAs to protect budget changes
Money saved in Isas is unlikely to be taxed retrospectively, meaning it makes sense to maximise the accounts now.
You can save the £20,000 annual allowance in a cash Isa, stocks and bonds Isa or innovative finance Isa, or spread the allowance across multiple accounts. You can save up to £4,000 in a Lifetime Isa.
If you save in a cash ISA, you do not have to declare the interest you earn to the tax authorities, because you do not have to pay tax on that income.
Capital gains and dividend income earned from a stocks and bonds ISA are not taxable and do not need to be declared to the tax authorities.
The same rules apply to innovative financial ISAs, which allow you to invest your savings in a wider range of assets, including peer-to-peer lending, crowdfunding bonds (corporate debt) and alternative funds.
These investments tend to be riskier, but have the potential for higher returns. The rules for Lifetime Isa’s are slightly different, although all income and gains are still tax-free.
You can open a Lifetime Isa if you are between 18 and 40, and you can then invest up to £4,000 a year until you are 50.
For every £1 you pay, the government adds 25p as a top-up (or 25 pc), meaning you could get up to £1,000 free every year.
You can only keep the bonuses if you use the saved money to buy your first home or to finance your retirement later.
Rosie Hooper, financial planner at Quilter Cheviot, warns: ‘Your Isa exemption resets every tax year and it’s a case of ‘use it or lose it’ as it can’t be carried forward to the next tax year.
‘While not everyone can save the full £20,000, it is important not to overlook it as it offers an excellent opportunity to grow your money tax-free.’
Be sensible with your Isas by maxing them out now to protect your money from Rachel Reeves’ changes, as the money you save in them is unlikely to be taxed retrospectively.
Be split-aware
The ISA rules changed on 6 April 2024. This means you can now spread your £20,000 ISA allowance across multiple cash and investment ISAs in the same tax year.
Ed Monk says: ‘This means that investors can spread their investments across different providers.
‘For example, if you want one stocks and bonds ISA for long-term investments and a separate ISA for regular transactions, then you have this level of flexibility.’
But, he warns, it can be easier and possibly cheaper to keep track of your investments if you combine them into one investment portfolio.
Monk also suggests using the ‘Bed and Isa’ rules.
This allows you to sell investments in a taxable account and buy them back into an ISA, potentially protecting them from a rise in capital gains tax in the Budget.
“This process is handled by your investment platform, so it’s worth allowing time to organise a transfer,” he adds.
How IHT changes could impact ISAs
Any money you have saved in an ISA will become part of your estate upon your death and will therefore be subject to inheritance tax.
However, your beneficiaries may inherit an additional allowance, allowing them to keep your tax-free savings in their own Isa. This is known as an Additional Permitted Subscription (APS) and becomes available to beneficiaries when approval is granted.
For example, an Isa worth £60,000 might be left to whoever the deceased chooses, but the surviving spouse or civil partner would be entitled to invest up to that value in their own Isa, in addition to their personal annual Isa allowance of £20,000 the following year, without paying tax. ‘Leaving them the money effectively means your spouse can inherit your Isa savings without losing the tax benefits,’ says Rosie Hooper.
Kevin Brown, savings expert at the Scottish Friendly Society, said: ‘There has been a lot of talk about tougher inheritance tax in the Budget, particularly the exemptions that pension savings currently enjoy.
‘While Isas do not actively reduce IHT to the same extent, removing such a benefit from pensions could increase the attractiveness of the Isa as an alternative.’
How families save £67,000 tax-free
Children are also entitled to up to £9,000 of tax-free savings a year, with parents putting £1.5bn into cash and stocks and Junior Isas in 2021/22.
Kevin Brown says: ‘The Junior Isa rules prohibit grandparents and other family members from opening a safe themselves. The parent or guardian is allowed to do it first. Once the safe is opened, other family members can contribute too.’
For a family of two parents and three children under 18, this means you could be putting away up to £67,000 a year, spread across several Isa accounts, none of which will incur tax.
Time to invest
According to Ed Monk, cash and investments carry different benefits and risks.
Cash is not vulnerable to losses like investments are. Investments, on the other hand, can lose value, but historically have produced higher net returns over the long term.
For those with a higher risk appetite, investing in the Alternative Investment Market (AIM) through a stocks and bonds ISA could be worthwhile, says Rosie Hooper.
‘AIM ISAs allow you to invest in smaller, growing companies and under current rules shares in these companies may qualify for business property relief,’ she says.
‘This means that they can be exempt from inheritance tax if they have been in possession for at least two years.’
But she warns: ‘The government could change or eliminate these tax breaks in future budgets, which could impact the effectiveness of this strategy.’
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