Savers put £4.2 billion into Cash ISAs in May, according to Bank of England statistics released today. This is the highest May figure on record and follows on the back of a record-breaking April (net inflow of £12.3 billion).
Savers know taxes are going up whoever wins the election, and are taking evasive action. Mortgage approvals for house purchase have flatlined at around 60,000 for four months.
Laith Khalaf, head of investment analysis, AJ Bell: “The new tax year has started with a big bang for Cash ISA savers, as £4.2 billion was tucked away in these tax shelters in May. That’s a record for the month, and builds on a record £12.3 billion squirreled away into Cash ISAs in April.
“Early bird ISA savers are no doubt out in force because they know taxes are rising as a result of frozen income tax thresholds. That means more people pushed up into the higher rate income tax band, where the Personal Savings Allowance falls from £1,000 to £500, or indeed to £0 for those in the additional rate tax bracket. Annual interest received from cash savings above these thresholds is taxable, unless held in an ISA wrapper, or paid in winnings from Premium Bonds.
“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.
“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. OBR estimates show collectively we’re going to be paying around £20 to £25 billion a year more as a result of the freeze on the personal allowance and higher rate threshold. The budget watchdog also reckons the freeze will bring 3.2 million people into paying tax, while creating 2.1 million more higher rate taxpayers and 350,000 more additional rate taxpayers. We can probably therefore continue to expect ISAs to play a starring role in the financial plans of anyone looking to save for their future.
“Bank of England figures also show mortgage approvals for house purchases dipped from 60,800 in April to 60,000 in May. Mortgage approvals have now flatlined at around 60,000 a month for the last four months, which suggests a stable, if not stellar backdrop to the housing market. Approvals have bounced back from their January 2023 low of just under 40,000, and are now pretty close to pre-pandemic levels, despite an enormous jump in mortgage rates. Rising wages and limited housing supply are also positive for the residential property market, which looks to have survived the exceptional rise in interest rates relatively unscathed.”
