The new Chancellor of the Exchequer, Rachel Reeves, stood up in the House of Commons in late October and made the annual Autumn Budget announcement to the UK. It was accompanied by a full statement from the Office for Budget Responsibility (OBR).

Among other important finance-related announcements, such as the increase in employer National Insurance (NI) contributions and pension funds soon being subject to Inheritance Tax, the Chancellor also made it clear that the tax-free Annual Individual Savings Account (ISA) Allowances will remain the same until April 2030. 

The Annual ISA Allowance freeze will impact investors across the UK. Luckily, this article will explore what the freeze means for investors and what the allowances would have been now if they rose in line with the UK’s inflation rate.

What does the freeze mean for my ISA?

The 2024 Autumn Budget, announced on the 30th of October, highlighted that Annual Allowances for all ISAs will remain the same. This keeps the limit for Cash ISAs and Stocks and Shares ISAs at £20,000 (US$25,400), Lifetime ISAs at £4,000 (US$5,080), and Junior ISAs at £9,000 (US$11,430). 

The Annual ISA allowance limits how much investors can put into their ISA accounts in one tax year, which runs from the 6th of April to the 5th of April the following year. The Annual Allowance for Cash ISAs and Stocks and Shares ISAs can be paid into one account or split the allowance across multiple accounts. However, investors can only pay into one Lifetime ISA in a tax year.

Unfortunately, the government’s decision to freeze the Annual ISA Allowances until April 2030 means that the limit is not rising with inflation, which is currently at 2.30 per cent.

On the one hand, investors can be relieved that the Chancellor of Exchequer didn’t announce a cut to the tax-free Annual ISA Allowance or impose a lifetime cap on how much can be accumulated in tax-free accounts. 

However, now that investors have been given a clear indication that the tax-free Annual Allowance will not rise for another six years, they might wonder what it means for their ISA accounts.

Also Read: How to revolutionise the banking and finance industry with Robotic Process Automation

According to HMRC figures, around 16.9 per cent of ISA holders reached their total tax-free limit between 2021 and 2022. So, let’s explore what the Annual ISA Allowances would be now if they had risen in line with inflation:

• The annual allowance for Cash ISAs and Stocks and Shares ISAs was raised to £20,000 (US$25,400) in April 2017. Today, the tax-free allowance would be £26,082 (US$33,138) if it had risen in line with inflation.
• The Junior ISA annual allowance increased from £4,368 (US$5,547) to £9,000 (US$11,430) in April 2020. However, if the tax-free allowance had continued to rise with inflation, it would be £11,277 (US$14,321) today.
• The Lifetime ISA annual allowance has remained at £4,000 (US$5,080) since its launch in April 2017, but it would be £5,216 (US$6,624) today if it had risen with inflation.

Investors with bigger pots that are more likely to reach the £20,000 (US$25,400) limit could lose out on up to £56,500 (US$71,755) due to the freeze. This is because if the Annual Allowance increased in line with inflation, they could have invested more tax-free money each year.

Is the government introducing a new ISA?

During the 2024 Spring Budget in March, the now-former Chancellor of the Exchequer, Jeremy Hunt, spoke about plans to introduce a new type of ISA called the British ISA. This gives investors an additional £5,000 (US$6,350) allowance – on top of their existing £20,000 (US$25,400) – to invest in UK shares. It would also come with the same tax advantages as other ISAs.

However, the Autumn Budget confirmed that the government would not be introducing the British ISA due to mixed responses to the consultation launched shortly after its announcement in March. 

Exploring the history of annual allowances

To conclude, it’s important to understand that there is no set method for how much and when annual ISA allowances should increase. In fact, the tax-free limit for ISAs has been frozen for significant periods in previous years. 

The Annual ISA Allowance was frozen at £7,000 (US$8,890) from its launch in 1999 until 2007 when it increased by £200 (US$248). It then went to £15,000 (US$18,600) in 2014 and finally to £20,000 (US$25,400) in 2017, where it has remained.

—

Editor’s note: e27 aims to foster thought leadership by publishing views from the community. Share your opinion by submitting an article, video, podcast, or infographic.

Join us on Instagram, Facebook, X, and LinkedIn to stay connected.

Image credit: Canva Pro

The post What does the 2030 annual ISA allowance freeze mean for investors? appeared first on e27.