Urgent warning to UK households with less than £20,000 in savings

Sky News reported earlier this year that we are, unfortunately, far from seeing the light at the end of the dismal cost of living crisis tunnel.

Instead, we’re expected to feel even more of a pinch as bills are set to mount.

And to make matters worse, a recent report published by the BBC saw the Bank of England suggesting we’re going to experience a rise in inflation throughout the year.

In an attempt to beat the crunch, thousands of UK households have been pouring their hard-earned wonga into saving schemes.

One of the most popular is a tax-free Individual Savings Account (ISA).

What is an ISA?

If you’ve never used an ISA, then basically, these investment pots can be used to save for your first home, invest in your future, or build a sweet retirement fund.

The annual limit for cash ISA contributions is £20,000 during the tax year (April 6 to April 5), and the good news is that this amount can be saved in a single account or distributed across multiple.

It’s thought that even though around eight million savvy savers are currently utilising these accounts each year Chancellor of the Exchequer and Labour Party MP Rachel Reeves is believed to be considering whether to scrap the tax-free cash version of the ISA savings account.

Households across the UK are therefore being warned that now is a better time than any to make use of an ISA and that it can offer some protection against ‘hidden taxes’, as per the Daily Express.

According to experts at Hargreaves Lansdown, 56 percent of new clients have actually opened a cash ISA in the last week and that deposits up 325 percent in 2025 so far versus the same period in 2024.

Sarah Coles, head of personal finance at Hargreaves Lansdown, said there were five hidden taxes that an ISA could be used to offset or prevent.

Avoid paying tax on a Sharesave scheme from work

ISAs can be used to save on capital gains tax (CGT) paid on shares bought from a Sharesave scheme (SAYE) or Share Incentive Plan (SIP), says Coles.

Essentially, as long as you transfer the shares into an ISA within 90s of ‘exercising the option on your shares’ then there won’t be any CGT to pay.

It should be noted though that you can only transfer up to £20,000 of shares into the account.

An ISA could protect from an unexpected CGT bill on a child’s bare trust

A bare trust is defined by Gov.uk as an account ‘used to pass assets to young people’ and are usually looked after by someone else until the beneficiary is old enough.

However, when the child on the account turns 18, they could be hit with a hefty CGT bill is they make ‘significant gains’, says the Hargreaves Lansdown expert.

Though this may be mitigated by utilising an ISA, says Tom Riley, the director of retail products at Nationwide Building Society.

“Cash ISAs not only help ordinary people save efficiently but enable us to fund our first-time buyer lending,” he explained.

“Any limitations on lending would further impact those looking to get a foot on the housing ladder at a time when saving for a deposit remains a significant challenge.”

AIM ISAs are currently potentially free of inheritance tax after two years

You may be intrigued to hear that Inheritance Tax (IHT) is not currently potentially payable on Alternative Investment Market (AIM) ISAs after two years.

Therefore, parents could use as ISA to avoid a whopping 60 percent tax bill from HMRC and also save money on childcare as a bonus, as per Birmingham Live.

“The rules mean that for every £2 in taxable income over £100,000, your personal allowance reduces by £1, and is completely extinguished by the time that income reaches £125,140,” added Coles.

If you earn over £100,000 then an ISA could help protect your cash (Getty Stock Image)

Those making over £100,000 could use an ISA to protect themselves

If you’re someone who annually makes over £100,000 and want to protect yourself from 60 percent tax and losing free childcare, then pouring your earnings into an ISA is a no brainer.

The financial advisor reports that there is no CGT levied on investments placed in a savings ISA and that no income tax is paid on interest.

This also includes taxable income from things like savings and dividends.

High-earning parent can save on the high income child benefit charge

A high-earning parent who opts to shelter their savings within an ISA could mitigate the impact of the high-income child benefit charge (HICBC).

This charge is equal to one percent of a family’s Child Benefit for every £100 of adjusted net income over £50,000 each tax year, with the threshold being over £60,000 for the tax year 2024 to 2025.

By moving some of your savings to an ISA, the income becomes tax-free, so doesn’t count towards the £100,000 limit, reports Coles.

“This saving is on top of the fact you’re not paying tax on this income,” she continued.

“If you made £101,000 in taxable income, and £1,000 of it was in taxable dividend income, you’d pay £337.50 in tax on those dividends (dividends are taxed at 33.75 percent for higher rate taxpayers).

“You would also lose £500 of your personal allowance, so at 40 percent that’s an extra £200 of tax. By moving those dividend-producing assets into an Isa, you could save £537.50 in tax in a single year.”