ISA savers have hit the jackpot when it comes to tax savings, as new data from HMRC reveals a sharp increase in the value of tax relief provided to both cash and stocks and shares ISA holders over the last few years. Figures obtained by AJ Bell through a freedom of information (FOI) request show that cash ISA savers collectively saved an impressive £2.1 billion in tax in 2023/24, up from just £70 million two years earlier. Meanwhile, stocks and shares ISA investors have seen their tax benefits double over the past six years, rising from £2.8 billion in 2017/18 to £5.6 billion last year.

WHY THE SUDDEN SURGE

The sharp increase in tax relief for cash ISA savers is largely down to rising interest rates, which have pushed more savings interest above the personal savings allowance, which is the amount taxpayers can receive in interest each year before paying tax. The allowance is £1,000 for basic rate taxpayers, £500 for higher-rate taxpayers and precisely £0 for additional-rate taxpayers.

With tax thresholds frozen and more people being pulled into higher tax bands too, the benefits of shielding savings from tax through an ISA have never been clearer. A typical cash ISA holder saved £114 in tax last year by wrapping their cash in a tax shelter, based on the latest figures published by HMRC. Savers with large holdings will have saved significantly more.

For a long time, low interest rates and the introduction of the personal savings allowance in 2016 made cash ISAs seem irrelevant to many savers, but the environment has shifted dramatically. With rates now at a much higher level, tax on savings is more difficult to hide from, and cash ISAs are back in vogue.

STOCKS AND SHARES ISAS: BIGGER GAINS, BIGGER SAVINGS

It’s not just cash ISA savers who are benefitting. Stocks and shares ISA investors saved an average of £721 in tax last year, thanks to the double-barrelled protection these ISAs offer against dividend tax and capital gains tax. The total tax relief provided by stocks and shares ISAs has doubled in the last six years, from £2.8 billion in 2017/18 to £5.6 billion in 2023/24.

Once again, rising interest rates have played a part, boosting income from bonds, cash, and money market funds — all of which are sheltered from tax within an ISA. However, other factors have driven the surge in tax relief for stocks and shares ISAs. The dividend and capital gains allowances have been drastically scaled back, leaving those who haven’t wrapped their investments in an ISA exposed to more tax.

At the same time, booming stock markets have created capital gains for investors which would be heavily taxed if held outside a stocks and shares ISA. A typical global index tracker fund has grown by 92% since April 2017 according to data from FE Analytics, while the capital gains allowance has been slashed from £12,300 in 2022/23 to just £3,000 now. This combination of shrinking allowances and rising market gains has made the tax protection offered by stocks and shares ISAs more valuable than ever.

A STRONG CASE FOR ISA SIMPLIFICATION

The success of ISAs over the years has led to a proliferation of different types of accounts, from Lifetime ISAs to Junior ISAs and Innovative Finance ISAs. While this gives savers and investors plenty of options, it has also created a more complex landscape that could benefit from simplification. However, one thing remains clear - ISAs are an incredibly valuable tool for anyone looking to protect their savings and investments from tax.

There have been rumblings the government might be looking to scale back the cash ISA allowance, though nothing has been officially confirmed. The Chancellor may well decide it’s not worth the candle, but it does serve as a reminder that the £20,000 allowance isn’t set in stone and can be changed by politicians at any point. Hopefully the powers that be continue to see the benefits of incentivising people to save for their future. But the challenging fiscal situation can lend itself to making even the clearest of views a little bit foggy.

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