'Triple blow for cash savers' as ISA overhaul to leave you with £2,380 tax bill - how to avoid

Laura Suter, director of personal finance at AJ Bell, described the situation as "a triple blow for cash savers," adding: "Quite simply, they will see more of their money taxed at higher rates."

Research from AJ Bell suggests most affected savers will simply move their excess funds into taxable accounts rather than explore alternatives.

The survey found 51 per cent of Cash ISA holders would place surplus money in standard savings accounts, leaving them exposed to substantial tax liabilities over time.

Those who currently maximise their £20,000 Cash ISA allowance will find themselves with £8,000 seeking a new home once the reduced limit takes effect.

Placing this sum in a standard savings account at four per cent interest generates £320 annually – a modest figure that nonetheless accumulates into significant tax obligations.

Additional-rate taxpayers, who receive no personal savings allowance, face the steepest penalties. Their tax bill reaches £2,380 after five years and climbs to £9,349 over a decade.

Higher-rate taxpayers will owe £1,152 after five years, increasing to £6,464 over ten years, while basic-rate taxpayers face £240 and £2,402 respectively.

Ms Suter noted: "These figures lay bare the personal cost to individuals of the Budget changes." She added that the policy "is also likely to be a huge cash cow for the government."

Premium Bonds offer one route to shelter savings from the taxman. A quarter of respondents in AJ Bell's survey indicated they would purchase Premium Bonds or other NS&I products if the Cash ISA allowance were reduced.

The appeal lies in the tax-free status of any winnings, though savers must accept there is no guaranteed return.

Each individual can hold up to £50,000 in Premium Bonds, with average returns currently sitting at 3.6 per cent based on typical winning odds.

Suter explained: "The appeal of Premium Bonds has just increased dramatically for some people, as any winnings are tax-free."

While this rate falls short of the best traditional savings accounts, the combination of potential larger prizes and tax-free status may prove attractive for those seeking alternatives before the April 2027 deadline.

The full £20,000 ISA allowance remains available for investments, presenting another option for those willing to accept market risk.

FCA figures reveal the number of people holding more than £10,000 in investible assets predominantly in cash has grown from 8.4 million to 11.8 million since 2021.

AJ Bell analysis demonstrates the potential cost of favouring cash: £1,000 invested annually since 1999 in the average IA Global sector would now total £92,349, compared with just £36,290 in a typical Cash ISA – a gap of £56,059.

Debt repayment represents another sensible use for surplus funds. In the survey, 13 per cent said they would clear mortgage debt with excess savings. Suter advised weighing mortgage interest rates against potential investment returns, noting: "It's a personal choice depending on your priorities."