Scrapping cash ISAs – a drag into self-assessment

Much has been mooted this week about the possibility of Rachel Reeves reforming, or even scrapping, the availability of cash individual savings accounts (ISAs) in an attempt to encourage average UK savers to invest more in the UK stock market. The thinking, or rationale, being that greater investment will stimulate growth in the UK’s economy, which would certainly be welcomed by Rachel Reeves. Recently published forecasts in a report by the HM Treasury has average GDP growth in January 2025 falling in comparison to December 2024, down 0.1%.

Whilst some taxpayers may yield to the above way of thinking and invest their funds into a stocks and shares ISA, many may still wish to hold cash savings in bank accounts due to the risks involved with owning equities. The likely tax impact for average UK taxpayers is that any interest paid on their savings, above their savings allowance, will be subject to income tax. This alone could drag many into self-assessment for the first time. It is questionable whether HMRC could cope with any additional demand on their services at a time when resource is stretched.

Furthermore, there is a potential hidden cost of being dragged into self-assessment as it can lead to a higher tax bill due to HMRC. In particular, this can impact graduates with student loans and more than one job, where none of their jobs provide them with a salary above the threshold at which they are required to make student loan repayments, but their total earnings exceed the threshold. Those on a plan 2 student loan could effectively find themselves with an unforeseen tax bill charged at 9% on any earnings above the threshold that they would not have suffered if they did not need to submit a tax return.

The potential impact that being in self-assessment can have may give some pause for thought. For some it may be worthwhile considering whether there are ways around falling into the potential self-assessment trap. For example, the real time capital gains tax service (available since the 2023/24 tax year) provides a means for taxpayers to report and pay tax on capital gains without having to register for self-assessment. The availability of this service still seems to be less well known though. Of note is the different deadline for reporting a gain, which is the 31st of December after the end of the tax year, and not the 31st of January. 

As we approach the end of another tax year, now is as good a time as any for making a financial plan to avoid the potential pain of submitting a tax return.