Neil Jones, tax and wealth planning specialist at Standard Life, comments: “The Chancellor’s decision to increase the rates of tax paid on cash interest is effectively widening the tax gap between savings inside and outside an ISA. Rates of tax were due to increase, but the government is going further by adding an additional two percentage points of tax above what was planned. This means that for basic rate taxpayers in receipt of more than £1,000 of interest, every extra pound of interest will be taxed at 24% rather than 20%. Similarly, for higher-rate taxpayers whose allowance is £500, any additional interest will be taxed at 44% rather than 40%. For additional rate taxpayers the change is particularly painful, as every pound of interest is taxable but at 49% rather than 45%.
“The decision to raise tax on cash interest was in sharp contrast to the decision to maintain the £20,000 cash ISA allowance, where the allowance was due to fall to £12,000 until today’s announcement.
“For those with significant cash balances or regular savings, the incentives have edged further towards ensuring money is directed towards an ISA. However, against a backdrop of inflation, it’s important those affected look carefully at whether their money is keeping pace with inflation and consider whether it would be better invested where there is the potential for higher returns, albeit without guarantees.”
