The ISA allowance currently stands at £20,000 in a single tax year. Will this change in the 2023-24 tax year? Here are some reasons why it just might happen.
[top_pitch]
When did the ISA allowance last change?
The annual ISA allowance has not changed for a long time. It has been frozen at £20,000 since the 2017/18 tax year. This means you can save or invest up to £20,000 tax free each year across a range of ISAs, including a stocks and shares ISA.
The government has already announced it will not change the allowance limit for the 2022/23 year, meaning it will have been frozen for six consecutive years.
This, in itself, is enough for many to speculate that an increase may be due in the 2023-24 tax year.
Before the increase to £20,000, the ISA allowance was nearly 25% lower at £15,240. This was itself a small increase from the previous £15,000 limit.
When ISAs were first introduced in 2009, the allowance was just £7,000.
What might lead to an increase in the allowance?
There are a number of factors that could lead to an increase in the ISA allowance. The most prominent of these is inflation. Simply put, saving or investing £20,000 in 2023 will be a lot less in real terms than if you’d saved or invested the same amount in 2017.
Inflation is very high right now – 5.5% according to the latest figures – making the difference even more obvious.
Increasing the allowance could allow savers and investors to reap the equivalent benefits they did previously.
Additionally, the mere fact that the allowance has not changed in six years suggests an increase may be on the cards. The allowance has not remained frozen for this long since ISAs were first introduced.
As increases in National Insurance contributions come into effect and most people will be paying more tax, increasing the ISA allowance could be framed as a tax break to help reduce the current tax burden.
[middle_pitch]
Why might the ISA allowance not increase?
While there are strong arguments supporting an increase in the allowance, the government may be reluctant to do this.
The vast majority of people do not save or invest the full amount into their ISAs each year.
Just 18% maxed out their ISAs in 2018-19 (according to the latest data available). However, this figure rises to 40% of those with income of £100,000 to £149,999, and to 61% of those with income of £150,000 or more.
The highest proportion of savers, around 44%, saved between £1 and £2,499.
Increasing the ISA allowance could be seen as a way to reward the wealthy rather than support those on lower incomes.
Will the ISA allowance increase for the 2023-24 tax year?
It is impossible to say whether the ISA allowance will increase in the 2023-24 tax year at this stage. However, as the points made above demonstrate, there are a number of factors that suggest an increase is overdue.
The government usually announces the next tax year’s ISA allowance in the Autumn Budget, which will be announced in October.
How much might the allowance increase to?
Again, it is hard to say what any new allowance might be.
As already mentioned, there have been both significant increases and much smaller increases to the allowance previously.
In the past, increases have been in line with inflation. Taking this approach, a new ISA allowance could be around £23,500. This is based upon the Bank of England’s inflation calculator for the period from 2017 to 2021 and a 5% inflation rate for 2022.
