‘I'm a savings expert – why Labour Government mean ISAs are now more important than ever'

Savers are urged to make the most of tax allowances “now” to protect their wealth pots amid “uncertainties” surrounding Labour’s fiscal plans.

While the party has pledged not to raise income tax, National Insurance, and VAT, some areas may have been tactfully ignored, such as Capital Gains, ISAs or inheritance tax plans.

This could leave these areas vulnerable to taxation, should more revenue need raising to fund its ambitious plans. William Stevens, head of financial planning at Killik & Co told Express.co.uk: “With a Labour Government now in place, the key topics on most savers’ and investors’ minds will be the uncertainty left by the gaps in manifestos – rather than what was included.

“Capital Gains Tax being a clear example here, with a refusal to acknowledge it won’t change, it remains a very real possibility that we see an increase to help fund any fiscal shortfalls elsewhere.”

Fears have stirred this could mirror a scenario of the previous Labour Government, in which former Prime Minister Gordon Brown broke promises and scrapped a tax break for pensions while acting as Chancellor.

Mr Brown removed tax relief on dividends that pension funds received on their investments – a move said to have largely contributed to the demise of Britain’s gold-plated Defined Benefit schemes.

While uncertainty prevails, there are steps to take to shield savings and investments, and people are being urged to act “now”.

ISAs are ‘more important than ever’ 

Pete Mugleston, MD and money expert at onlinemoneyadvisor.co.uk, commented: “Labour typically advocates for increased taxes on higher earners to invest in infrastructure and expand spending on public services such as healthcare and education.

“This could impact your disposable income and, consequently, your ability to save. However, the good news is that Labour is unlikely to reduce the current ISA allowance of £20,000 per year, which allows you to continue leveraging tax-free savings options effectively.

“Economic policies under Labour might lead to interest rate fluctuations. For instance, if their spending leads to inflationary pressures, the Bank of England might raise interest rates to control inflation which could mean better returns on Cash ISAs. Conversely, higher interest rates will likely make borrowing more expensive.”

However, Mr Mugleston noted: “The impact on individual finances under a Labour Government can vary widely. Higher earners might find themselves facing increased tax burdens while those benefiting from enhanced housing support could see improved opportunities.”

To navigate these potential changes effectively, Mr Mugleston said: “You can take several proactive steps, such as diversifying investments to spread risk, maximising contributions to tax-efficient ISAs, and considering fixed-rate mortgages to secure stable repayments.”

Shaun Moore, tax and financial planning expert at Quilter, pointed out that, given the Labour Government is set to inherit a set of “very stretched” public finances, it is “unlikely” there will be any big tax relief giveaways.

He said: “At least in the short term, frozen tax bands will continue to cause more people to pay higher amounts of tax on the interest earned from their savings.”

Emphasising Mr Mugleston’s point, Mr Moore said: “It’s important people turn to ISAs which allow savers to earn interest tax-free to protect their earnings from tax.”

For many years due to low interest rates, tax on savings was not a problem for most people unless they had vast pots. But now, Mr Moore said: “Many more people might find they end up having to pay tax without seeking the safety of the ISA.”

How could ISA rules change under Labour?

Rachel Springall, finance expert at Moneyfactscompare.co.uk floated that a new Government could choose to abolish existing tax savings allowances or other money-saving policies.

Ms Springall explained: “One tax-free allowance the Conservative Party introduced was the Personal Savings Allowance (PSA) in 2016, and that is something that could change.

“If this were to be withdrawn, this could lead to a spike in savers turning to use their ISA allowance, which protects their savings interest from tax. ISA allowances could also be revisited in future, but savers might be hopeful for the ISA allowance to rise from £20,000, as it has not changed for years.”

Without knowing which way – if any – tax-free allowances will go, now is a good time for people to check if they could benefit from the current ISA rules.

Another plan for ISAs that could now be dropped is the British ISA, which was designed to boost investment in the UK economy, but some criticised it would “confuse savers”.

Touching on one more likely change, Ms Springall said there could be a drop in the Bank of England rate. But, she noted: “There have been murmurings for this to occur over the past few weeks due to the fall in inflation.”

If this takes shape, people could see a spread of high-interest savings deals pulled from the market, making it ever-important for people to review current pots to see if they’re investing in the best possible accounts for them.

While there remains “a big question mark” over what Labour might do to Capital Gains Tax, Mr Moore said it has become “ever more important” to shelter assets in an ISA.

He noted: “Labour failed to rule out increasing this area of the tax landscape while explicitly ruling out other rises to taxes like income tax and National Insurance. While knee-jerk financial decisions based on ‘ifs and maybes’ are never wise, utilising your ISA allowance is always a prudent financial decision.”

What about pension savings? 

While much of the discussion around private pensions from Labour has been centred around the institutional pensions landscape rather than personal, Labour has confirmed it will not bring the Lifetime Allowance (LTA) back. This move leaves pensions “safe for now”, Killik & Co’s Mr Stevens has said.

He continued: “It has also proposed a comprehensive review of the pension system to improve outcomes for retirees – but with limited detail. So, we have a watching brief here.”

On the subject of watching briefs, Mr Stevens said: “Labour has also promised a review of the taxation on the Carried Interest system, which is used in remuneration for those working in Private Equity. This may take some time, but Labour will have an entire political term to implement any changes following the findings from their review.

Mr Stevens noted that, while no one is going to be able to accurately predict the potential impact of these changes, given the “uncertainty”, it is an “incredibly important time” to review financial plans.

Mr Stevens said: “Now is as important as ever to make sure you are utilising any tax allowances you have available – particularly, saving into ISAs and pensions – to ensure you are not subject to unnecessary Capital Gains Tax. As always, if you are unsure, seeking advice from a qualified financial planner can help with all of this.”