Will the Isa limit FINALLY rise from £20k? Budget hints for savers

Savers may have seen little reason to applaud Jeremy Hunt’s Budget, but tucked away in the fine print, there are some promising signs.

It indicated that the annual Isa allowance could finally rise from the £20,000 it has been stuck at since 2017 and NS&I savers and Premium Bondholders could get more rate hikes.

While the £20,000 tax-free limit on money deposited into Isas was frozen for the upcoming tax year, Cost document spring budget has cost future tax years based on the Isa surcharge rising in line with CPI inflation.

If the cost is indicative of future policy, it suggests that there could finally be some upward movement on this annual fee from tax year 2024/25.

Meanwhile, the Office for Budget Responsibility predicted inflation could fall to 2.9 percent by the end of this year. If interest rates on savings accounts remained at current levels, that would be slightly inflationary.

Treasury-backed bank NS&I has also been told to increase its deposits – which could mean interest rate hikes for its depositors.

We explain what savers need to know about Jeremy Hunt’s 2023 Budget.

Increase the Isa allowance in 2024?

At present, people can save or invest up to £20,000 each tax year in an Isa, with interest, dividends or capital gains protected from taxation.

Jeremy Hunt chose to maintain the annual Isa fee cap for the forthcoming tax year (2023/24) at £20,000.

However, the treasury Cost document spring budget made future tax years more expensive based on the Isa allowance rising in line with CPI inflation – estimated to cost the Treasury an additional £35 million in the 2024/25 tax year.

If the cost is indicative of future policy, it suggests that there could finally be upward movement on this annual fee from tax year 2024/25.

The tax-free £20,000 Isa Savings and Investment Allowance has been in effect since April 2017, with savers and investors watching the party turn into famine after the limit skyrocketed from £11,880 to £15,000 in July 2014 before falling again in just under three years. got a big boost later on.

If the £20,000 tax-free allowance had increased each year in line with CPI inflation since 2017, the annual allowance would now be around £26,000.

If it followed the same formula as the triple lock guarantee for pensions, which accounts for September’s inflation rate each year, based on OBR forecasts, we could see the 2024/25 Isa supplement increase by 4 percent. This would increase the £20,000 annual stipend by £800.

Anna Bowes, co-founder of Savings Champion says: ‘While savings rates have risen significantly since base rates started rising in December 2021, the cost of living has risen at a much faster rate, so even though the pounds in people’s pockets of their savings are rising , it is not enough.

‘And since the Eigen Voucher has remained at the same level since the start in April 2016, more and more savers are paying more tax on their money, at a time when earning as much as possible has never been more important.

“So while it’s encouraging that Isa surcharge could increase by CPI from April 2024, it’s disappointing that we have to wait another year to see this benefit.”

With inflation now peaking and expected to fall to 2.9 percent by the end of this year, this could be seen by some as too little too late.

However, if inflation proves to be more stubborn than the Bank of England or OBR predicts in the long run, it could give savers some much-needed rest.

Andrew Hagger, of comparison service MoneyComms, added: “It would be good to see some flexibility in Isa limits going forward, but double-digit inflation could be long gone by April 2024.

“If inflation were above the government’s target of 2 per cent, that would mean an increase of just £400 in the first year.

‘Now that the savings rate has been high for almost a decade, many more people are at risk of exceeding their personal savings deduction and will therefore be more dependent on Isas to keep their savings tax-free.

“The government needs to be more generous if it is serious about encouraging a broader and more beneficial savings culture in the UK.”

Will Savings Accounts Beat Inflation?

For two years no savings account has managed to keep up with inflation – the rate at which prices are rising. This means that savers have become poorer in real terms.

However, the OBR now forecasts inflation to fall to 2.9 per cent by the end of this year, meaning UK savings will no longer be eroded.

As of the 12 months leading up to January, inflation is at 10.1 percent. The best easy-to-access savings deal, which pays 3.4 percent, and the best one-year solution, which pays 4.35 percent, lag far behind.

But if inflation falls back as the OBR predicted, the gap between savings rates and inflation will continue to narrow.

If inflation falls to 2.9 per cent by the end of the year, that means something that cost £1,000 at the end of last year will cost an average of £1,029 at the end of this year.

Someone who deposited £1,000 into the best one-year fixed rate savings account at the end of last year and paid 4.25 per cent will have £1,042.50 by the end of this year – beating inflation.

Someone who puts their money into the best one-year fix today and pays 4.33 percent would have to work out what inflation would be 12 months from now.

The OBR expects inflation to fall to just 0.9 percent next year. That means that a saver in the best deal with a fixed interest rate is expected to be better off in real terms.

There is one important caveat to all this, however. The projections from the OBR are ultimately just projections. How CPI inflation plays out this year is far from guaranteed.

Will NS&I increase its rates even further?

Savings rates from National Savings & Investments have recently been on the rise and savers can expect even more good news in the coming 12 months.

This year’s changes include five price fund rate increases for Premium Bonds.

Last month, NS&I raised the premium rate for Premium Bonds to 3.3 percent – the highest rate in more than 14 years.

It also launched a new issue of its Green Savings Bonds at a fixed rate of 4.2 per cent over three years and relaunched its Guaranteed Growth Bond for new customers – who paid 4 per cent on its one-year fixed-rate deal.

The government now wants NS&I to collect more money than was previously necessary in the coming tax year.

Prior to the budget, NS&I was tasked with raising £6bn in savings, but this has now risen to £7.5bn.

Laura Suter, head of personal finance at AJ Bell says: “There was good news for depositors buried in the details of this year’s budget as the government wants its savings bank NS&I to raise even more money in the next tax year.

‘Currently, the government-backed provider was tasked with raising £6bn in savings, but this has now risen to £7.5bn.

Although this seems like a very technical point, it means that NS&I will have to make its products more attractive to savers – which means a higher interest rate for savers.

“It also means that the Premium Bond prize fund will undoubtedly get another boost to attract more savers.”

“While the funding target is nowhere near the £35 billion set during the pandemic, we can expect NS&I to return to its pandemic playbook and significantly raise rates on most of its accounts.

Overall, it doesn’t want to lead the markets, but this goes out the door if it needs to raise more savings.

“This is a double incentive for savers as they can get higher rates from the government-backed provider, but it will also spur other savings providers to raise their rates – hopefully the start of a new rate war.”

Yesterday, NS&I reported a £0.5m increase in net funding between October and December 2022.

This is clearly significantly below what would be required to reach £7.5bn over a year – which requires a run rate of £1.75bn per quarter.

Others, however, are less sure it will result in a big rate hike.

A spokesperson for the Savings Guru said: ‘It’s difficult to call NS&I. We don’t know what impact the rate increases on Premium Bonds to 3% and then 3.3% have had, nor the increases on Income Bonds and direct depositors to 2.85%.

Our feeling is that these have probably done enough to shift the run rate to that level, so this suggests there is no need to raise rates again in the near term.

What is difficult to predict is what will happen if the base rate goes up to 4.25% next week, as we expect.

“We think this will raise easy access rates to about 3.5 percent for the best buys, which could lead to a small increase in premium bond yields to 3.5 percent, but the fund rate of 3.3 percent can yield enough to do this. ‘not necessary.’