Chancellor Rachel Reeves will set out her first Budget at the end of this month – but with what she says is a £22bn black hole in the UK’s finances to deal with, it’s unlikely there will be many giveaways.
Instead, speculation has abounded about changes to pension tax relief and tax-free cash after the Chancellor warned of “tough decisions” coming ahead.
There has also been suggestion that there could be some changes made for savers. Here is what could possibly happen, according to experts.
ISAs
One of the biggest questions for savers is whether Ms Reeves will touch ISAs.
These accounts are used as a tax-efficient way to save money as they offer tax-free interest payments.
Previous chancellors have left ISAs largely untouched – despite calls both for them to be made less generous, and for improvements to the Lifetime ISA (Lisa).
At the moment, the tax-free limit for ISAs is £20,000 per tax year.
Andrew Hagger, founder of MoneyComms, told i that the Chancellor could look to cut this limit if she’s looking to raise funds for the Treasury.
Another lever she could pull is introducing an overall cap on how much money you can have protected within an ISA – for example, £100,000 or £200,000.
The Resolution Foundation, a research organisation seeking to improve living standards for those on low and middle incomes, previously called for a lifetime cap on ISA savings of £100,000.
Mr Hagger said: “These are areas that Rachel Reeves could reduce tax benefits for savers – the question is will she be brave enough to do so and risk a further backlash so soon after cutting the winter fuel allowance for some pensioners?”
On the other end of the scale, Ms Reeves could look at making some improvements – particularly to the Lisa, which is used to help people save for their first home or towards retirement.
The current Lisa rules mean people can save up to £4,000 a year and receive a government bonus of 25 per cent (up to £1,000 a year) on top.
However, there is an early withdrawal charge of 25 per cent – effectively acting as a 6.25 per cent exit penalty – if savers choose to take out money for any reason other than purchasing a first home costing up to £450,000 or for retirement.
Tom Selby, director of public policy at AJ Bell, says the charge is “deeply unfair and punishes those for whom a change of circumstances means they can’t pursue their homeownership aspirations”.
He says the Government should consider reducing the withdrawal charge to 20 per cent and also increasing the minimum property purchase price to reflect house price inflation.
However, James Blower, founder of The Savings Guru, says while ISAs are “desperate for reform” the Chancellor has “bigger priorities than sorting those out for now”.
“I think the best savers can hope for is a commitment to review (perhaps to propose changes in next years Budget),” he says.
Tax-free allowances
Experts say we’re unlikely to see an increase to the personal savings allowance in this Budget – and it could even be cut.
The personal savings allowance (PSA) allows people to earn interest on their savings without paying tax on that interest.
Basic rate taxpayers can earn £1,000 in savings interest per year tax free, while higher-rate taxpayers can earn £500.
There is zero allowance for the wealthiest on the additional rate for income tax.
Mr Blower says he had expected a small increase to the annual allowance to £2,000 as this would be a “relatively cheap” way for Ms Reeves to do something for savers.
“However, the means testing of the winter fuel allowance means this now looks highly unlikely as it would invite more flack if she was seen to give away tax breaks to savers when many pensioners have had the allowance taken away.
“Given that, with the ISA allowance and the PSA, basic rate taxpayers can [save enough] without paying tax on interest, I think [the Chancellor] will decide she has other areas that need money spent on.
“Sadly, I think this will be another quiet Budget from a saver’s perspective.”
Mr Hagger adds Labour’s warnings of a “painful” Budget mean we could see personal savings allowance cut or even abolished.
Focused help
The Government could also target certain groups of savers to help people increase their returns.
Sarah Coles, head of personal finance at Hargreaves Lansdowne, said: “One option that’s open to Reeves is to introduce focused products to help specific groups.
“We’ve seen this in recent years with the popular pensioner bond, announced by the government and operated by NS&I, providing a particularly generous rate for older people. The Chancellor has the freedom to use this mechanism to bring in any kind of product she wants – benefiting any group she chooses.”
There is also the help-to-save product, designed to help those on lower incomes.
One option would be to extend the groups that qualify for it, so that people with slightly more wiggle room in their budget – who are more likely to be able to afford to put money aside for the future – can take advantage.
