Will the Isa limit FINALLY rise from £20k? Budget hints for savers

Savers may have seen little reason to cheer Jeremy Hunt’s Budget – but buried away within the small print there are some promising signs.

It indicated that the annual Isa allowance could finally rise from the £20,000 it has been stuck at since 2017 and that NS&I savers and Premium Bond holders may get more rate hikes. 

While the £20,000 tax-free limit on money put into Isas was frozen for the upcoming tax year, the Treasury’s Spring budget policy costings document has costed up future tax years based on the Isa allowance rising in line with CPI inflation. 

If the costings are indicative of future policy, it suggests that from the 2024/25 tax year there might finally be some upward movement on this annual allowance.

Meanwhile, the Office for Budget Responsibility forecast that the rate of inflation could fall to 2.9 per cent by the end of this year. If the interest rates on savings accounts stayed at their current level, this would make some inflation-beating. 

Treasury-backed bank NS&I has also been told to increase its deposits – which could mean rate rises for its savers. 

We explain what savers need to know about Jeremy Hunt’s Budget 2023. 

Good news for savers? Savings rates are finally on course to overtake the rate of inflation by the end of this year

The Isa allowance to rise in 2024?

At present people are able to save or invest up to £20,000 each tax year into an Isa, shielding any interest, dividends or capital gains from tax.

Jeremy Hunt opted to maintain the annual Isa allowance limit at £20,000 for the coming tax year (2023/24).

However, the Treasury’s Spring budget policy costings document has costed up future tax years based on the Isa allowance rising in line with CPI inflation – which it estimates would cost the Exchequer an additional £35million in the 2024/25 tax year.

If the costing are indicative of future policy, it suggests that from the 2024/25 tax year there might finally be some upward movement on this annual allowance.

The £20,000 tax-free Isa saving and investing allowance has been in place since April 2017, with savers and investors seeing feast turn to famine after the limit rocketed from £11,880 to £15,000 in July 2014 before getting another big boost just under three years later.

If the £20,000 tax-free allowance had risen each year in line with CPI inflation since 2017, the annual allowance would now be roughly £26,000.

If it followed the same formula as the pension triple lock guarantee, which takes into account September’s inflation figure each year, then based on OBR forecasts we could see the Isa allowance for 2024/25 rise by 4 per cent. This would see the £20,000 annual allowance rise by £800.

Readers Also Like:  Plaza Wires sees a stellar debut. Should you hold the stock for more upside?

The tax protector: You can think of an Isa as a shield that protects your savings or investments from being subject to taxation

Anna Bowes, co-founder of Savings Champion says: ‘Although savings rates have increased substantially since the base rate started to increase in December 2021, the cost of living has increased much faster, so although the pounds in people’s pockets from their savings are increasing, it’s not enough.

‘And with the Personal Savings Allowance remaining at the same level since inception in April 2016, more and more savers will be paying more tax on their cash, at a time when earning as much as possible has never been more important.

‘So, while encouraging that the Isa allowance could rise by CPI from April 2024, it’s disappointing that we’ll have to wait yet another year to see this benefit.’ 

With inflation having peaked and expected to fall to 2.9 per cent by the end of this year, this may be seen by some as too little too late.

However, if inflation proves more sticky than the Bank of England or OBR are forecasting over the long-term, this could provide some much needed respite to savers.

Andrew Hagger, of comparison service MoneyComms adds: ‘It would be good to see some flexibility in Isa limits going forward, but double digit inflation may well be long gone by April 2024.

‘If inflation was at the top of the Government’s target of 2 per cent it would mean an increase of just £400 in year one.

‘With savings rates close to a decade high, many more people are now in danger of exceeding their personal savings allowance and so will be more reliant on Isas as a way of preserving tax free status on their savings.

‘The Government needs to be more generous if it seriously wants to encourage a wider and more beneficial savings culture in the UK.’

Will savings accounts beat inflation?  

For two years now, not a single savings account has managed to keep up with inflation – the rate at which prices rise. This means savers have become poorer in real terms.

However, the OBR is now forecasting that inflation will fall to 2.9 per cent come the end of this year meaning that Britons savings will stop being eroded.

As of the 12 months leading to January, inflation is at 10.1 per cent. The best easy-access savings deal, paying 3.4 per cent, and the top one-year fix, paying 4.35 per cent, fall well short of this.

But if inflation falls back as the OBR predicted, the gap between savings interest and inflation will continue to narrow.

If inflation falls to 2.9 per cent by the end of the year, this means that on average something that cost £1,000 at the end of last year will typically cost £1,029 by the end of this year.

Someone who stashed £1,000 in the top one-year fixed rate savings account at the end of the last year paying 4.25 per cent, will end up with £1,042.50 by the end of this year – therefore beating inflation.

Someone stashing their cash in the best one-year fix today paying 4.33 per cent would need to work out what inflation would be in 12 months time.

The OBR is projecting inflation to fall to as low as 0.9 per cent next year. That means a saver in the best fixed rate deal is projected to be better off in real terms.

There is one major caveat to all of this, however. The OBR’s projections are ultimately just projections. How CPI inflation plays out this year is far from guaranteed. 

The latest OBR report anticipates the headline CPI inflation rate dipping towards zero by 20205

Will NS&I put up its rates even more? 

The savings rates offered by National Savings & Investments have been on the up of late and savers may be set for further good news over the coming 12 months.

The changes this year include five increases to the Premium Bonds prize fund rate.

Last month, NS&I upped the prize fund rate for Premium Bonds to 3.3 per cent – the highest rate in more than 14 years.

It also launched a new issue of its Green Savings Bonds paying a fixed rate of 4.2 per cent over a three-year term and relaunched its Guaranteed Growth Bond for new customers – paying 4 per cent on its one-year fixed rate deal.

The Government now wants NS&I to raise more money over the coming tax year than was previously required. 

Prior to the Budget NS&I was tasked with taking in £6billion of savers’ money, but this has now risen to £7.5 billion.

Savings lottery: Premium Bonds offer an average prize fund rate of return that has now risen to 3.3% – a level that beats most easy access savings deals

Laura Suter, head of personal finance at AJ Bell says: ‘There was good news for savers buried in the detail of this year’s Budget, as the Government wants its savings provider NS&I to raise even more money in the next tax year.

‘Currently the Government-backed provider was tasked with taking in £6 billion of savers money but this has now risen to £7.5 billion.

‘While this might seem like a very technical point, what it means is that NS&I will have to make its products more attractive to savers – which equates to higher interest rates for savers.

‘It also means the Premium Bond prize fund will undoubtedly be boosted again, to lure in more savers.’

‘While the funding target is nowhere near the £35billion set during the pandemic, we can expect NS&I to go back to its pandemic playbook and significantly boost rates across the majority of its accounts.

‘Generally, it doesn’t want to lead the markets, but this goes out the window if it needs to drag in more of savers’ money.

‘This has a double boost for savers, as they can get higher rates with the Government-backed provider but also it will spur other savings providers to increase their rates – hopefully marking the start of another rates war.’

Yesterday NS&I reported a £0.5million increase in net funding between October and December 2022.

This is clearly significantly under what it would need to be to hit £7.5billion over one year – which requires a run rate of £1.75bn per quarter.

However, others are less certain it will result in a big rate rise.  

A spokesperson for the Savings Guru said: ‘It’s difficult to make a call on NS&I. We don’t know what impact the rate increases on Premium Bonds to 3 per cent and then 3.3 per cent have had yet, nor the increases on income bonds and direct savers to 2.85 per cent. 

‘Our feeling is that these are likely to have done enough to shift the run rate to that level so this will suggest there’s no need to increase rates again in the short term. 

‘What’s difficult to predict is what happens if base rate goes up to 4.25 per cent next week, as we expect. 

‘We think that will shift easy access rates up to around 3.5 per cent for the best buys, which could see a small hike in Premium Bond rates to 3.5 per cent, but the 3.3 per cent fund rate may be bringing in enough that this isn’t needed.’