British savers collectively avoided paying £2.79 billion in taxes on their savings interest in the 2024-25 tax year, a significant increase driven by higher interest rates and frozen income tax thresholds. This figure represents more than double the £1.3 billion saved in the previous tax year and a thirteenfold increase compared to six years prior.
The surge in tax savings is attributed to a combination of factors. Elevated interest rates on savings accounts have made tax-free wrappers, such as Cash ISAs, increasingly valuable. For basic-rate taxpayers, a £1,000 savings interest allowance exists, while higher-rate taxpayers have a £500 allowance. Additional-rate taxpayers have no tax-free allowance. However, any interest earned within an ISA is entirely tax-free, making these accounts crucial for maximizing returns, especially when top savings rates have exceeded 4% and even 5%.
Additionally, income tax thresholds have remained frozen since 2021. As individuals' pay has increased, many have been pushed into higher tax bands, reducing or eliminating their tax-free savings allowance and making ISA accounts a vital shelter for their savings interest.
Planned ISA Allowance Reduction
Despite the recent surge in tax relief, this benefit is set to diminish for many savers. Beginning in April 2027, the maximum amount that can be saved in a Cash ISA will be reduced from £20,000 to £12,000 for individuals under 65. This change, announced by former chancellor Rachel Reeves, aims to redirect savers towards investments in British equities, as the Stocks and Shares ISA allowance will remain at £20,000.
Consequently, individuals with more than £12,000 in savings will need to consider using Stocks and Shares ISAs or accept that the remainder of their funds will be held in taxable savings accounts. Savers are reportedly maximizing their contributions to Cash ISAs before the allowance cut takes effect.
Increased Tax Savings for Investment ISAs
Savers and investors using Stocks and Shares ISAs have also experienced a rise in tax savings. In 2024-25, ISA investors benefited from £5.78 billion in dividend tax relief, up from £4.32 billion the prior year. Capital gains tax savings within ISAs also increased to £1.18 billion from £1.04 billion in the previous tax year.
This growth in tax relief for investment ISAs is partly due to recent tax changes that have impacted returns on regular investment accounts. Capital Gains Tax (CGT) rates were increased in October 2024, with basic-rate taxpayers seeing a rise from 10% to 18%, and higher-rate taxpayers from 20% to 24%. The annual CGT-free allowance has also been significantly reduced, falling from £12,300 in 2022-23 to £3,000 in 2024-25. Dividend tax rates also saw a two-percentage-point increase in April, while the tax-free dividend allowance decreased from £2,000 to £500. These measures make holding investments within the ISA wrapper more advantageous for protecting gains from taxation.