No £25,000 ISA which contractors wanted, but Autumn Statement 2023’s ISA package is still an asset

Last month’s Autumn Statement 2023 didn’t contain the Individual Savings Accounts measures we’d perhaps all hoped for, or even been led to expect.

Like many advisers in this space, I was keeping my fingers crossed for an increase to how much money contractors and other ISA holders can stash in these tax-free saving vehicles, given that it’s now been six long years since the ISA allowance was uplifted, writes Angela James of Yolo Wealth.

Your £20,000 ISA allowance: unchanged

But maybe we’re all being too downbeat? The upside is that despite Jeremy Hunt clearly being a chancellor who likes to halve and halve again, he held back and left the ISA allowance intact. Put another way, we all still have £20,000 that each tax year can be saved into an ISA.

An ISA allowance of £20,000 does mean, in real-terms, that this maximum limit has reduced significantly, but with most people in the current climate having less savings due to cost-of-living increases, I would say no ISA uplift is not as huge a blow as it might otherwise be.

Freedom, choice, and taking advantage

As to actions the chancellor did take, from April 6th 2024, you’ll have the freedom to spread that £20,000 allowance across as many ISAs as you like, including a Stocks and Shares ISA.

So let’s say you see a good ISA rate with ‘Bank One’ and use up half your allowance, and then you set up a Stocks & Shares ISA using a quarter of your allowance. But later on in 2024, ‘Better Bank’ offers its own ISA rate and, you’ve guessed it, it’s better than what you have with Bank One! Well, you’re going to be able to subscribe to Better Bank’s ISA using the remaining quarter of your allowance (all in the same year).

Furthermore thanks to Autumn Statement 2023, you can even now move some (or all) of your invested ISA savings between providers during the course of the year -- something else the chancellor gave the green light to. Previously, this moving of full or partial ISA funds between providers couldn’t be done.

This means that if there is a better ISA deal to be had, you are now allowed and able to take advantage. Previously, you had one choice per year, and once that choice was made, you couldn’t reverse it or swap to an alternative.

Partial transfers of ISAs: example

For example, let’s say you put your full ISA allowance into Bank One on April 6th 2024 because they had a decent ISA rate. Then though, a couple of months later, Better Bank trumped the deal by offering, say, a fixed rate cash-ISA for six months. Well, under Autumn Statement 2023, you get to move some or as much as you like of the ISA you opened in April with Bank One to your new ISA with Better Bank. As mentioned, ISA savers couldn’t do this before as you only got one cash subscription per tax year. 

In a related move, at chapter 5.40 of Autumn Statement 2023, the government says it will be removing the requirement to reapply for an existing ISA annually.

What does this mean, in practice? Well, previously with the rule of only having one cash ISA and one S&S ISA subscription per year, if you had an existing cash ISA and you didn’t pay in any funds within the year, then the account would go dormant.

No longer a requirement to declare

To be able to pay in again, you would have to reapply (‘declare’) that you hadn’t funded another cash ISA within the same year. As this rule is now abolished under the Autumn Statement, there is no longer a requirement to provide a declaration.  

In the run-up to the chancellor’s package, there was talk by the government about flexible ISAs. This remains a nice and useful feature of the ISA landscape and it’s already in place.

In fact, with a flexible ISA, you can withdraw some of your used allowance within the tax year and replace it within the same tax year. This means if you invest £20,000 at the start of the tax year, but a few months later you need £5,000 to pay a bill, or HMRC, or even take a nice holiday, you can withdraw that £5,000 and replace in back into the ISA before the end of the tax year.

What is an Innovative ISA?

Another ISA worth mentioning, which by contrast is mentioned in Autumn Statement 2023, is the Innovative ISA.

The Innovative ISA is not a S&S ISA, instead; it permits the investor to invest into peer-to-peer lending. These Innovative ISAs are available with a select few providers. And on November 22nd 2023, the government said it wis opening up a couple of new forms of investment that can be held with the Innovative ISA as ‘allowable assets.’ But be aware – these types of investments will not be suitable for most investors and are specialist investment assets and vehicles.

Digital reporting – incoming to SIPPs too

Autumn Statement also announced the digitalisation of the ISA reporting system to enable the development of digital tools to support investors. My sense is that this development will be more important now that people are going to be allowed to hold multiple ISAs of the same kind. And it’ll also be a vital way for the government to track investors’ ISAs investments to ensure that no individual over-subscribes above their annual allowance. The same digitalisation of the reporting system is already scheduled to grace SIPPs and other personal pensions in April 2025.

Less positively, at 5.45 of the Big Green book, the chancellor says the government will harmonise ISAs to those over 18 years of age, from April 2024.

Grumpy 16-year-olds? Very possibly…

Stocks and Shares ISAs have always only been available to those aged over 18, so this tweak seems more of an administrative ease to align cash ISAs to the same age. It will make oversight easier. Sadly though, this means that for 16-to-18-year-olds, they will potentially lose some allowance, as the Junior ISA allowance is limited to £9,000.  

In addition, the government further used Autumn Statement to say it will legislate in the Autumn Finance Bill 2023 to remove the Lifetime Allowance.

According to HM Treasury, the measure will “clarify the taxation of lump sums and lump sum death benefits, and the application of protections, as well as the tax treatment for overseas pensions, transitional arrangements, and reporting requirements.”

How will the removal of the Lifetime Allowance hurt?

Well, the devil will likely be in the detail as more information comes forward before the April 6th 2024 removal of the Lifetime Allowance. The freezing of the tax-free lump sum as a fixed amount, does mean in real terms that the overall tax relief received by those exceeding the Lifetime Allowance will be less effective.  

And maybe there’s a theme here because, as said at the outset, the biggest groan you’ll likely hear from an ISA holder about Autumn Statement 2023 is that it neglected to increase the allowance, which hasn’t moved since 2017. Even an inflationary increase to £25,000 would have been nice. Maybe the chancellor believes such an increase in the ISA allowance would be more fitting at Spring Budget 2024, when the cost of living may have eased a smidge.

ISAs for contractors, as the dust settles on Autumn Statement 2023

For contractors, regardless of whether you are a PSC or an umbrella contractor your structure doesn’t impact your ISA options.

ISAs are available to all as individual investors. This means you can invest into an ISA from already taxed income. If you are a Personal Service Company, you would utilise your disposable income after tax or as a vehicle to make better use of existing savings you have personally. What an ISA doesn’t do is allow you to use income direct from your contractor business or gross -- before income tax. But you have other options for these, such as making the most of your valuable pension allowances. And some good news at Autumn Statement 2023 that’s worth pointing out -- there were no reductions to this allowance and the pensions annual allowance remains at £60,000.

That aside with the current landscape and rising taxes, what an ISA can do is make sure that the money you have already paid tax on can be saved or invested without further exposure to HMRC. You can invest into an ISA and retain all your interest or returns free from further income tax or capital gains tax.

Final thoughts (for contractors keen to save tax)

With these Autumn Statement changes, ISAs are now the most flexible they have ever been, and while this comes with a few administrative changes which will need to bed down, the typical contractor needn’t worry about these. The disappointing news was that it’s still £20k you’re restricted to but on the flip-side, pension allowances have increased 50% this tax year, and for contractors this remains the biggest tax savings opportunity.