All the evidence suggests that from a broader market perspective, 2022 could be one of the quietest ISA seasons on record.

The Bank of England data for March showed moderate growth in the ISA balance in March – a month in which we usually see a big increase – and I’m sure the April figures won’t show a positive story.

There can be several reasons for this. Rates offered through savings accounts have been at historic lows in recent months and the yields on offer may not have compelled people to make sure they use their ISA allowance.

The issue of the cost of living is also beginning to affect household budgets, which can hamper people’s ability to save.

Additionally, prominent market commentators have been actively advising people not to save in an ISA this year, or even to transfer savings already within an ISA to non-ISA accounts.

To me, that’s shortsighted and doesn’t reflect the demographic differences and the needs of the nation’s savers.

What are the tax benefits of ISAs?

The main argument used by commentators is that the majority of people do not pay tax on their savings due to the Personal Savings Allowance (PSA) introduced in 2016, and the rates offered on non-ISA accounts have generally been higher than those within an ISA.

It is certainly true that the PSA removed some of the incentives to save in an ISA package.

20% base rate taxpayers can earn up to £1,000 interest a year on any savings without paying tax on them; after that, their interest is taxed at 20%.

Taxpayers at the top 40% rate can earn up to £500 a year; after that, their interest is taxed at 40%. The top 45% of taxpayers do not receive PSAs – all of their interest is taxed at 45%.

However, there is a strong cohort of savers focused on building a strong cash savings position who can and will continue to benefit from the tax relief that an ISA can provide over the long term, particularly if you are a higher rate taxpayer.

A higher-rate taxpayer needs a savings pot of just over £24,000 before they start incurring interest on their savings, based on the current five-year ISA rate of 2.1% .

Although it may seem out of reach for many savers, a savings pot can build up quickly for a variety of reasons.

Saving regularly helps build a healthy balance steadily over a period of time, while life events – inheritance, work bonus, release of equity from a goods sale – can result in financial windfall.

Will ISA rates go up?

Additionally, we have been in a low interest rate environment as the Bank of England cut the base rate to stimulate the economy during the pandemic. This situation is being reversed as the Bank faces runaway inflation and we have seen a series of recent base rate increases.

Although not entirely and exclusively driven by the bank prime rate, savings rates have also increased and are expected to return to pre-pandemic levels.

No one has a crystal ball to say for sure how rates will differ between ISA and non-ISA savings accounts, but advising savers to drop their tax allowance based on current rates could result in people paying unnecessary taxes in the future.

Additionally, people who may be lower rate taxpayers today could also find themselves in the higher rate bracket in future years.

If you were currently earning a rate of 2.1% for 12 months, rising to 3.5% in year two and 4.5% in year three, a £60,000 pot would earn £6,060 in interest over three years . In this scenario, someone earning £60,000 a year would pay £2,224 in tax on their savings.

How many savers still use ISAs?

It is impossible to offer one-size-fits-all type advice to savers, as each individual has different savings requirements and goals.

Despite a quiet 2022 ISA season, ISAs remain incredibly popular. Government statistics show there were 9.7 million cash ISAs subscribed in 2020 (latest figures available), with the amount subscribed increasing by £7.1 billion on the previous year.

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Paragon Solihull Group

At Paragon, our clients certainly appreciate the ISA tax abatement and we had one of our busiest days on April 4, as clients made sure to use their full allowance.

Why? Because they already have healthy savings balances in the ISA envelope and they want to make sure they don’t pay unnecessary tax on their money.

Derek Sprawling is Director of Savings at Paragon Bank