Savers in the United Kingdom shielded £2.79 billion from taxes in the 2024-25 fiscal year by utilizing cash Individual Savings Accounts (ISAs), a figure more than double the previous year's relief and a substantial increase from six years prior. This significant tax saving is attributed to a combination of elevated interest rates on savings and frozen income tax thresholds. However, these benefits are poised to decrease for many individuals starting next year due to planned reductions in ISA allowances.
According to figures obtained by stockbroker AJ Bell through a Freedom of Information request to HM Revenue and Customs, the rise in tax savings reflects the enhanced attractiveness of ISA wrappers in an environment of higher interest rates. For basic rate taxpayers, a standard savings account offers a £1,000 tax-free interest allowance annually, with interest above this threshold subject to income tax. Higher-rate taxpayers have a £500 allowance, while additional rate taxpayers have none. In contrast, all returns within a cash ISA are tax-free, making them a crucial tool for protecting savings interest from taxation, especially when top-paying accounts have offered rates exceeding 4% and sometimes 5%.
The freezing of income tax thresholds since 2021 has also played a role. As individuals' pay has increased, many have been pushed into higher tax bands, reducing or eliminating their tax-free savings interest allowance and making the ISA shelter increasingly vital.
These substantial tax savings are anticipated to continue for the current year as savers deposit funds ahead of a planned reduction in the cash ISA allowance. The government announced that the maximum amount that can be saved in a cash ISA will be cut from £20,000 to £12,000 for individuals under 65, effective April 2027. The allowance for stocks and shares ISAs will remain at £20,000, a move reportedly intended to encourage investment in British equities. Consequently, savers with more than £12,000 to deposit will need to consider stocks and shares ISAs or taxable savings accounts for the remainder.
Investment ISA Tax Savings Also Increase
Investors in stocks and shares ISAs have also experienced a notable rise in tax savings. Dividends and capital gains earned within these investment accounts are tax-free. In 2024-25, ISA investors received £5.78 billion in dividend tax relief, up from £4.32 billion the previous year. Capital gains tax savings amounted to £1.18 billion, an increase from £1.04 billion in 2023-24. These increases are partly a response to recent tax changes that have affected regular investment accounts. In October 2024, capital gains tax rates were raised, and the tax-free allowance was significantly reduced from £12,300 in 2022-23 to £3,000 by 2024-25. Additionally, dividend tax rates rose by two percentage points in April, and the tax-free dividend allowance decreased from £2,000 to £500. These adjustments have amplified the tax advantages of holding investments within the ISA wrapper.