Millions of savers are set to pay tax on their savings interest this year as frozen tax thresholds and shrinking allowances quietly pull more people into the tax net.
According to Emma Wall, Chief Investment Strategist at Hargreaves Lansdown, the combination of rising interest rates and tighter allowances means more of your investment returns could end up going straight to HMRC.
“A toxic mix of frozen income tax thresholds, reduced allowances on savings, capital gains and dividend tax means more people are being pulled into paying tax on their savings and investments,” she said.
With the 5th April ISA deadline approaching, using your £20,000 annual ISA allowance could protect your savings from several hidden taxes.
Here are the four taxes an ISA quietly shields you from, plus a little-known bonus many families overlook.
1. Tax on savings interest
Higher interest rates have boosted returns for savers, but they’ve also pushed millions over the personal savings allowance.
Currently the allowance is:
- £1,000 for basic-rate taxpayers
- £500 for higher-rate taxpayers
- £0 for additional-rate taxpayers
These limits haven’t changed since 2016, meaning more people are now paying tax on interest earned in ordinary savings accounts.
Inside a Cash ISA, however, all interest is completely tax-free.
There could also be an added incentive to act soon. The government has proposed cutting the ISA allowance to £12,000 from 2027, meaning the current £20,000 allowance may not last forever.
2. Dividend tax
Dividend income is another area where tax is quietly increasing.
The dividend allowance has been slashed to just £500 a year, meaning investors can quickly face a tax bill if they hold shares outside an ISA.
From April, dividend tax rates will also rise:
- Basic rate: 10.75% (up from 8.75%)
- Higher rate: 35.75% (up from 33.75%)
- Additional rate: 39.35%
Within a Stocks & Shares ISA, dividend income is entirely tax-free.
Investors who already hold dividend-paying shares outside an ISA can move them into the tax shelter using a strategy known as a “Bed & ISA.”
3. Capital gains tax
Successful investors can also face capital gains tax (CGT) when selling investments.
The annual CGT allowance has shrunk dramatically, falling from £12,300 four years ago to just £3,000 today.
Any gains above that are taxed at:
- 18% for basic-rate taxpayers
- 24% for higher-rate or additional-rate taxpayers
But investments held inside an ISA are completely free from capital gains tax, allowing investors to keep every penny of their returns.
4. Inheritance tax advantages on AIM shares
Some shares listed on London’s Alternative Investment Market (AIM) can also offer inheritance tax benefits when held in an ISA.
Currently, qualifying shares can be passed on free from inheritance tax after two years.
However, this relief will be cut from 100% to 50% from April 2026, meaning assets above the inheritance tax threshold will face an effective tax rate of around 20%.
While less generous than before, that still represents a significant saving compared with the standard 40% inheritance tax rate.
The ISA bonus many families overlook
There is also a powerful but little-known ISA benefit for couples.
When someone dies, their ISA normally becomes part of their estate for inheritance tax purposes.
However, a surviving spouse or civil partner receives an additional permitted subscription (APS) allowance equal to the value of the deceased’s ISAs.
For example, if someone leaves £200,000 in ISAs, their partner receives an extra £200,000 ISA allowance — on top of their normal £20,000 annual allowance.
This allows them to move their own savings into a tax-free ISA wrapper and keep the tax benefits alive.
Use your ISA allowance before it’s gone
Unlike pensions, ISA allowances cannot be carried forward.
If you don’t use your allowance by 5 April, it disappears permanently.
With taxes on savings, dividends and investments rising, an ISA remains one of the simplest and most powerful ways to keep more of your money out of the taxman’s reach.
Richard is the founder of the Good Money Guide (formerly Good Broker Guide), one of the original investment comparison sites established in 2015. With a career spanning two decades as a broker, he brings extensive expertise and knowledge to the financial landscape.
Having worked as a broker at Investors Intelligence and a multi-asset derivatives broker at MF Global (Man Financial), Richard has acquired substantial experience in the industry. His career began as a private client stockbroker at Walker Crips and Phillip Securities (now King and Shaxson), following internships on the NYMEX oil trading floor in New York and London IPE in 2001 and 2000.
Richard’s contributions and expertise have been recognized by respected publications such as The Sunday Times, BusinessInsider, Yahoo Finance, BusinessNews.org.uk, Master Investor, Wealth Briefing, iNews, and The FT, among many others.
Under Richard’s leadership, the Good Money Guide has evolved into a valuable destination for comprehensive information and expert guidance, specialising in trading, investment, and currency exchange. His commitment to delivering high-quality insights has solidified the Good Money Guide’s standing as a well-respected resource for both customers and industry colleagues.
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