Today’s budget announcement was awaited by many with a degree of trepidation. Once we got past the early release of the Office for Budget Responsibility’s (OBR) report, the markets stabilised with the FTSE100, bond markets and sterling all being a little positive. As ever, there is more detail to come out in the respective papers, but the overriding feeling is one of complication.
How could changes to ISA allowances impact your savings?
The annual ISA allowance remains at £20,000, but from April 2027, there will be a new layer of complexity for savers to navigate. This is a throwback to the old ISA system; in simple terms, you can put £20,000 into an ISA, but only £12,000 of that can be deposited into a cash ISA each year, and the remaining £8,000 of the allowance must be invested in stocks and shares.
For those who use their full £20,000 in stocks and shares, this means there is no actual change. However, if you use the full cash ISA allowance, you will be restricted to only £12,000 - unless you are aged 65 or over, in which case you can still contribute £20,000 into a cash ISA.
This leaves a choice: do you take your first steps into investing in stocks and shares? Or do you accept that you will pay tax on the interest when saving these monies into a normal cash savings account? Bear in mind that the latter will also have an additional income tax levy based on the changes to income tax for interest, rent and dividends.
The theory behind this change is to drive more investment, specifically into the UK. It's difficult to see how this will have any meaningful impact on the UK economy, principally because only a small proportion will be allocated to UK equities.
This change is set to take place from 6th April 2027, meaning investors have a little more time to contemplate their next steps. It also reinforces the idea of using allowances whilst they are available to you.
Restrictions to salary sacrifice contributions
The other major change that will catch the eye of those saving for retirement is the limitation on salary sacrifice. This is less punishing than it could have been; it essentially means that you will still get the tax relief, but you won’t get the National Insurance relief on a pension contribution above the new £2,000 threshold. The change might appear relatively minor, but it is nonetheless a change that may paint pensions in a less attractive light.
Importantly, this is scheduled for 2029, so the impact is not immediate. Once again, it makes sense to use the current legislation whilst it is available to you.
Complexity of taxes on income
The 2% increase in taxation for those in receipt of rent, interest and dividends is also a further complication that will see many more people pushed closer to or over the 40% higher rate tax bracket. The complication here is that non-earned income is set to be taxed at a higher rate than earned income. These changes are staggered, April 2026 for dividends and April 2027 for savings and rental income.
These key changes add complexity to both planning and ensuring the correct levels of tax and NI are paid. It is not clear how this will help fill the fiscal deficit, and it is a concern that additional complexity may deter people from saving for their own future.
It’s important to seek advice and to retain control over your own savings and investments. Please call 0808 144 5575 or email help@armstrongwatson.co.uk.
