When it comes to finances and politicians….. very rarely do the two worlds lead to a ‘simple’ outcome.
In the case of the changes being made to ISA’s (Individual Savings Accounts) from April 2027 – things are pretty complicated.
Let’s untangle it all.
Ten years ago, George Osbourne (the Chancellor at the time) lifted the cash ISA allowance to match the stocks and shares annual amount. This was pretty radical, as the original intention had been to offer long term investors larger allowances than cash savers. That is because we know the power of long-term investment and how the collective weight of ISA investing helps to really support British businesses.
George’s argument was that in ‘simplifying’ the ISA regime, more people could save as there would no longer be any barriers and folk could just switch between cash and stocks and shares ISA’s seamlessly. It also meant that an investor could chose to actually hold cash within their stocks and shares ISA for a period of time. From my perspective, I would say that George’s argument was correct.
However, there were unintended consequences.
Over the past decade, we have seen more and more ISA holders opt for either the cash ISA or deciding to invest in shares of US and other countries. This hasn’t helped British businesses at all.
Recent governments have wrestled with how to resolve this and so the decision has been made to try and make cash ISA’s less attractive in terms of the amount you can save each tax year. So far so good.
However, this also has unintended consequences!
The government became squeamish about reducing the current £20,000 allowance for pensioners. To this end, they have said that anyone over 65 can still use the full £20,000 allowance for cash. At this point, feel free to switch off if you are over 65!
If you are under 65 – stay with me!
Ms Reeves has decided that those under 65 will only have a cash ISA allowance of £12,000 per tax year from this coming April.
Is this a problem for your stocks and shares ISA portfolios with Thomas and Thomas?
Not massively no, but let me outline the issues we have seen so far – bearing in mind that nothing is firmly decided by the government yet.
The government spent months consulting with big investment platform businesses such as Quilter. This meant that some things were changed to help us a little going forward.
From April, you will not be able to hold cash within a stocks and shares ISA without paying 22% tax on any interest.
This headline is true, but if we drill down a little further, we can see some options here.
It will still be possible to hold things called money market funds. Our more cautious portfolio holders will be familiar with the Black Rock Cash fund which we have utilised previously within their asset allocation. This type of fund is not strictly viewed as ‘cash’ by the government – provided you don’t hold 100% of your ISA in these money market funds.
This means that technically you could hold 99% in money market funds and 1% in shares to avoid the 22% tax charge – as things currently stand. Remember, this is all still being ‘consulted’ on and could change.
But what about cash in a cash account that is simply paying interest?
Our thoughts immediately went to the Quilter cash account which all our clients hold within their portfolios for a small percentage of their funds. These cash accounts are used to provide for fees throughout the year.
Well in these cases, any interest paid will be taxed at source at 22% by Quilter and this tiny amount handed over to the government.
What about if you decide to ‘come out of the market’ for a bit and sit in cash? Again, any interest will be subject to that 22% tax charge and handed over to the government before you can get it.
Can you claim this 22% back if you are a non-tax payer? No.
Will you have to disclose it on a tax return? No.
If you are a higher rate tax payer, will you have to pay additional tax? No.
So, in short, if you are over 65 then nothing has really changed. If you are under 65, your existing (and any new stocks and shares) ISA’s can hold 100% cash if you want – but Rachel is going to snaffle 22% of any interest you earn – at source.
There are ways of planning to prevent falling into this trap and that is what we are here for.
We had been starting on a new lego video with Norman to extoll all the virtues of ISA’s including these new rules. However, the media frenzy over Tuesday and Wednesday this week meant I needed to get something out to you quicker.
And anyway, I have a hunch I might need to replace my Rachel lego figure…..
As ever, we are here for you 100% if you want to check anything at all.
My very best wishes
Darren
