Brits flock to cash ISAs as tax hikes bite

Savers have continued to funnel their money into cash ISAs in a bid to avoid higher taxes following frozen thresholds, new Bank of England figures have revealed. 

Households deposited £4.2bn into cash ISAs during May, the highest figure for the month. It followed a record-breaking April, which saw a net inflow of £12.3bn. 

The increase in households pushing their cash towards savings comes amid anxiety surrounding frozen tax thresholds. Last month, HMRC statistics revealed that an estimated 4.4m more UK residents would pay tax over the coming years. 

This phenomenon, known as fiscal drag, occurs when frozen thresholds pull taxpayers into higher tax bands. It raises millions for the Treasury and has been described as a stealth tax by some experts. 

Laith Khalaf, head of investment analysis at financial services firm AJ Bell, said: “Early bird ISA savers are no doubt out in force because they know taxes are rising as a result of frozen income tax thresholds.”

“At the same time tax thresholds have been frozen, interest rates have risen, making it more likely that savers will breach their tax-free savings allowance. The best easy access rates are offering around 5% interest, which would mean a basic rate taxpayer with over £20,000 in cash, or a higher rate taxpayer with over £10,000 in cash, would be on the brink of paying tax on their cash interest, unless held in a tax shelter,” Khalaf said.

Labour and the Conservatives have battled it out over tax during the election campaign, but the Institute for Fiscal Studies has criticized both parties for being opaque about their taxation plans. 

Both parties have pledged not to raise income tax, National Insurance, or VAT, though Labour has said it plans to keep the current tax thresholds frozen until 2028. 

Khalaf said: “While much of the election campaign has seen Labour denying it’s going to raise taxes and the Conservatives promising to cut them, one message which has been received loud and clear is that frozen tax thresholds mean we’re all going to be paying more and more income tax in the next four years.”

The higher number of cash ISAs comes amid falling mortgage approvals. These fell from 60,800 in April to 60,000 in May, as approvals for remortgaging also dropped slightly, from 29,900 to 29,600. 

As a result, net borrowing fell from £2.2bn in April to £1.1bn in May as UK consumers continued to save more.