Savers have put £42bn into cash Isas in the first half of 2024 to avoid tax

New data shows savers poured £42bn into cash ISAs in the first six months of the year.

There was £351.6bn in adults’ bank accounts at the end of June, compared with £309.3bn at the end of December 2023, figures from Paragon Bank show.

Many savers are likely to put money into ISAs to avoid potential savings tax. Lately, they have also been trying to shelter as much money as possible tax-free, due to rumours about various tax measures that the new government could introduce.

Fixed-rate cash Isas took the lead, rising from £157.9bn to £188.5bn in the six-month period, according to CACI analysis of data from 40 savings providers.

Easy-access Isa balances also increased, rising by £11.2bn to £156.4bn.

It is striking that the value of cash in fixed-rate ISAs in June 2024 exceeded the value of fixed-rate savings accounts without ISAs for the first time since November 2022.

Overall, total adult savings rose by £70.7 billion in the first half of the year to £1.18 trillion.

What is behind the Isa line?

Savers are looking for ways to protect their savings from tax fraud as higher interest rates have boosted returns on savings over the past two years.

Latest estimates from HMRC show that £10.4 billion in tax is expected to be raised from savings interest this tax year, compared to £9.1 billion in the 2023/24 tax year.

High savings rates are good news for savers, but they are also a double-edged sword. They have also caused many savers to exceed their Personal Savings Allowance (PSA), which has been frozen at the same level since 2016.

The PSA means that basic rate taxpayers pay no tax on the first £1,000 of interest they earn each year, while higher rate taxpayers have a £500 exemption. Top-up rate taxpayers do not receive the PSA.

When the PSA was introduced in April 2016, the best one-year fixed rate bond on the market was offering 1.91 per cent interest. So a basic rate taxpayer would have exceeded the £1,000 PSA with a deposit of £52,357.

Currently, the best one-year bond pays 4.95 per cent interest, so a basic rate taxpayer would exceed the allowable interest by £20,230.

Similarly, the best easy access account paid just 1.45 per cent in April 2016. So a deposit of around £69,000 would have put it over the PSA’s base rate.

With top rates now around 4.9 per cent, £20,000 in an easy-to-withdraw account would earn you £980 in interest.

The big attraction of cash ISAs is that savers can save up to £20,000 each tax year and shelter their savings from tax. The interest earned is completely tax-free, unlike low-interest or fixed-rate savings accounts.

As a result, record savings have flowed into Isas. In the first month of this tax year alone, savers poured a record £11.7bn into cash Isas, Bank of England figures show – the biggest inflow for the start of a tax year since tax-free accounts were launched in 1999.

According to interest rate monitor Moneyfacts Compare, the average easy-access cash Isa pays 3.26 per cent, while the average one-year Isa pays 4.25 per cent.

This time last year, the average low-interest ISA paid 3.15 percent, while the average one-year ISA paid 5.27 percent.

The fact that the average interest rate on one-year Isas has fallen has not stopped savers from pouring an extra £30.6bn into one-year Isas in the first six months of 2024.

Savers can easily access cash Isas yielding up to 5 per cent, with the best one-year fixed rate Isa yielding 4.67 per cent and the best two-year fixed rate Isa yielding 4.4 per cent.

Derek Sprawling, Managing Director Savings at Paragon Bank, said: ‘The number of deposits in cash ISAS has increased dramatically in recent months, particularly in the fixed rate segment of the market, with balances doubling since the end of 2022.

‘The increase is understandable, as the growth in the savings rate means more savers face the prospect of having to pay tax on money held in non-ISA accounts.

‘While rates have fallen since their peak, there are still plenty of high-rate taxpayers who could benefit from using their Isa exemption to limit their exposure.’