Chancellor closes £29k Isa loophole – here’s how long you have left to cash in
Time is running out to cash in on an Isa loophole that allows wealthy parents to save £29,000 a year for their children tax-free.
Money saved in Isas is free from tax on savings interest, dividend tax and capital gains tax. Currently, 16 and 17-year-olds have two Isa allowances – £9,000 for a Junior Isa and £20,000 for a cash adult Isa.
This is due to a discrepancy which means you must be over 16 to open a Cash Isa, whereas the Junior Isa runs until age 18, when it converts into an adult Isa.
But in a policy document published alongside the Autumn Statement, the Government changed the rules so that savers soon will have to be aged 18 or over to open a cash Isa.
However, the changes do not kick in until April 2024. This means parents with enough spare cash can still save up to £29,000 on behalf of a child before the end of this tax year when the loophole will be closed.
Nimesh Shah, of accountancy firm Blick Rothenberg, said: “You’d have to be a pretty rich teenager to make use of it. But for wealthy parents, this can help augment their tax-free allowances. If they had two children, parents could save almost £60,000 extra tax-free.”
Isas have become even more valuable in the era of higher interest rates, which has brought with it the threat of tax.
With the best savings accounts paying more than 5pc in interest, a higher-rate taxpayer would need only £10,001 in savings before they would have to start paying tax on their savings.
Higher-rate taxpayers are limited to earning £500 in interest before tax is charged, while for basic-rate taxpayers the allowance is £1,000. Additional rate taxpayers get no allowance, meaning any interest earned from savings is immediately taxable.
Mr Shah said the Autumn Statement was a “missed opportunity” to increase the allowances and reduce the number of savers increasingly caught out by frozen tax bills.
Documents published on Wednesday revealed that the Isa (£20,000), Junior Isa (£9,000) and Lifetime Isa (£4,000) annual limits will remain frozen at their current levels in the next tax year.
However, the Government will also simplify the Isa regime by allowing savers to pay into more than one of the same type every year.
At the moment savers can pay into just one of each. Sarah Coles, of stockbroker Hargreaves Lansdown, said: “For cash Isa savers, it offers the opportunity to jump on more competitive deals, if they become available later in the tax year.”
However, stockbroker AJ Bell said the Government fell short of announcing radical reforms. The stockbroker has previously called for a “One Isa” account to make the savings vehicles easier to understand.
Tom Selby, of AJ Bell, said: “The Chancellor has chosen to tinker at the edges rather than pursue radical Isa simplification for the benefit of savers and investors. It is ridiculous Brits are currently faced with a choice of six types of Isa when deciding where to invest for the future, with different rules and allowances further clouding the picture.”
The Chancellor was understood to also be considering an extra £5,000 Great British Isa allowance for savers investing exclusively in British shares in a bid to boost the economy. While the Treasury is understood to be actively considering such a scheme, the Chancellor made no mention of the proposal in his Autumn Statement.
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