The ISA Allowance will remain unchanged for the 2022/23 tax year. It has been at its current level of £20,000 since 2017.

Factoring in inflation – which is set to rise further over the coming months – left This is Money asking recently whether the freeze constitutes “a stealth tax on savings”.

Meanwhile, the same report confirms that money has flowed out of Cash ISAs for the sixth month in a row. This marks the first time that this has happened in the product’s 22-year history.

Whether a Cash ISA is still right for you might depend on the best rate you can find, as well as whether you are looking to hold the funds over the long or short term.

ISAs are a tax-efficient way to save

You can invest £20,000 a tax year into the ISAs you hold, and you won’t pay tax on the interest you earn.

Since 2016, the Personal Savings Allowance (PSA) has meant that basic-rate taxpayers can earn £1,000 of interest a year with no tax to pay, but your ISA savings count above this amount and will not attract tax either.

As a higher-rate taxpayer, your PSA is £500 a year, while for additional-rate taxpayers (those earning £150,001 or more) there is no allowance at all.

While savings rates are currently low, you could benefit from shopping around. If you want to retain instant access to your cash, you might need to settle for a lower rate. Lock your money in for a fixed term, however, and you might be able to secure a more competitive rate, especially if you make regular contributions.

The ISA Allowance and high inflation might make the Cash ISA a less appealing prospect

The ISA Allowance has been set at £20,000 for the last few years. While the chancellor’s Budget freezes to the Lifetime Allowance, Capital Gains Tax Allowance, and Inheritance Tax nil-rate bands grabbed headlines, the ISA Allowance freeze could be also be seen as a stealth tax.

The ISA Allowance had previously risen in line with inflation; however, it is important to note too that the limit rose sharply in 2014 (from £11,880 to £15,240) and then jumped again to its current level in 2017.

Had the limit increased in line with inflation since it reached £20,000, savers could have expected the limit to reach £21,776 in the 2022/23 tax year.

The allowance freeze is set to be exacerbated by rising inflation.

Source: BBC

Inflation doubled in April 2021, rising from 0.7% to 1.5%. It then rose above the Bank of England’s (BoE’s) 2% target, reaching 2.1% in May.

The latest figures for October confirm the cost of living rose by 4.2% in October. This marks a 10-year high, with forecasts suggesting the figure could peak above 5%.

These figures mean that the money held in your bank account or Cash ISA is unlikely to be rising in line with the increased cost of living; your fund could be effectively losing value in real terms.

It is worth remembering, though, that your money (as long it is held with an FCA-regulated bank or building society) is protected by the Financial Services Compensation Scheme up to £85,000.

You might consider a Stocks and Shares ISA as a potential alternative

A Stocks and Shares ISA has the same £20,000 subscription limit for the 2022/23 tax year as a Cash ISA. Rather than holding your money in cash, though, it will be invested in the stock market. Your fund value could rise as well as fall, but the additional risk brings an added chance of reward too.

You’ll need to think about your attitude to risk, but once you understand your risk profile, any gains you make are free of Income Tax and Capital Gains Tax (CGT).

As with any investment, a Stocks and Shares ISA needs to be a long-term proposition, so it won’t be the right option if you expect to need the invested money in the next five years.

If you’re happy to leave your money tied up and able to grow, though, a Stocks and Shares ISA is a great long-term alternative to cash.

Get in touch

Boolers can help you manage your savings in the most tax-efficient way possible. Whether you’re looking for the best place to keep easy-access cash funds or you’re looking for a longer-term investment with the chance of greater returns, we can help.

If you would like to discuss your savings and investment options, or any other aspect of your long-term financial goals, please contact us today.

Please note

The value of your investments (and any income from them) can go down as well as up and you may not get back the full amount you invested. Past performance is not a reliable indicator of future performance. Investments should be considered over the longer term and should fit in with your overall attitude to risk and financial circumstances.