Although it’s just possible that there will be an announcement in the next budget, I expect that the Personal Savings Allowance and the ISA allowance will both remain the same in the 2023/24 tax year.
With interest rates rising and allowances remaining at the same level for years, many savers will be paying more tax than they would have, had these valuable tax free allowances been upped each year.
The Personal Savings Allowance (PSA) has remained the same since it was introduced in April 2016. Quite simply it has been ignored since inception. And the ISA allowance has not been increased for seven years!
The PSA means that basic rate taxpayers pay no tax on the first £1,000 of savings interest earned per year, for higher rate taxpayers the allowance is £500 – and additional rate tax payers receive no allowance at all. But as savings rates rise, this allowance is being used up far more quickly.
Last year the best easy access account was paying around 0.50% which meant that a basic rate taxpayer would breach the allowance with a deposit of £200,000. Today, with the best easy access account paying 2.81% the allowance will be breached with just £35,587.
In his Autumn Statement, as well as confirming that the freeze on income tax, national insurance and inheritance tax thresholds would continue for a further two years, until at least April 2028, the Chancellor also announced that he is reducing the threshold at which the 45% income tax rate applies. It will be reducing from £150,000 of earned income, to £125,140. As a result more and more people will fall into this additional rate tax band – meaning they lose their PSA altogether, and the freeze on the tax-free personal allowance being extended for a further two years, will see more people also becoming higher rate tax payers and therefore seeing their PSA cut in half.
While we knew that the ISA allowance would be frozen until April 2023, it will be disappointing although not unexpected to see it remain frozen for another year. If so, this means that the ISA allowance will have been £20,000 for seven years – the last time the allowance was increased was April 2017, from £15,240 to its current level.
For savers, the ISA allowance has become far more relevant in recent months, as rising interest rates means that many more are paying income tax on their savings accounts and with even the best interest rates available paying far less than inflation, every penny counts.
The good news is that if these tough measures do start to reduce inflation as the OBR has predicted, if savers continue to earn this level of interest, or even more, then they may actually start to earn a real return.
@savingschampion
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