- Biggest ever cash ISA season – with £17.8 billion inflows in March & April
- Net mortgage borrowing hits lowest on record (omitting Covid times)
- NS&I draws in £1.6 billion of savers money – rate cuts could be around the corner
Laura Suter, head of personal finance at AJ Bell, comments on the latest Money and Credit data from the Bank of England:
Cash ISAs
“We saw the biggest ever cash ISA season with a record-breaking £17.8 billion of money paid into cash ISAs in March and April this year, as savers rushed to shelter their money from the government’s bumper tax grab. This total is almost six times the amount of money that was paid in during the same two months last year, with rising interest rates meaning more savers wanted to stop tax eating into their savings interest.
“A huge £11.9 billion was paid into cash ISAs in April, the largest ever recorded, on top of the £5.8 billion paid in during March – a record for that month. Cash ISA subscriptions usually peak in March and April each year as savers leave it down to the deadline to pay money into the tax-free accounts before their allowance resets at the new tax year on 6 April.
“Savers faced a triple threat this year that could mean they pay tax on their savings interest for the first time ever. This year rising interest rates mean that savers are getting a higher return on their money and many will breach their Personal Savings Allowance, which gives £1,000 of tax-free savings income for basic-rate taxpayers and £500 for higher-rate taxpayers, but no allowance for additional-rate taxpayers. What’s more, the government’s frozen tax bands means more people will be pushed into the next tax bracket and see that tax-free savings allowance either cut in half or wiped out altogether. On top of that, the additional rate tax band has been cut to £125,140 for the current tax year, meaning more people will see their Personal Savings Allowance taken to zero and face 45% tax on all their savings interest.
“For example, someone with £50,000 of savings who earned £130,000 a year would have faced no tax on that savings interest during times of low interest rates when it was earning 1% interest, as it would have been within their £500 Personal Savings Allowance. However, in the current tax year if that same pot was now earning 5% interest, they’d face a £1,125 tax bill* on the interest as a result of rising rates but also now being in the additional rate tax band, and so getting no Personal Savings Allowance.”
*5% interest on a £50,000 pot = £2,500. Taxed at 45% = £1,125.
Savings accounts
“Savers continued to move their money into fixed-rate accounts to make the most of higher savings rates as many feared peak interest rates were nearing. We saw £3.7 billion paid into fixed rate accounts in April, as £5.4 billion of money was withdrawn from instant-access accounts. It’s the sixth consecutive month of outflows from easy-access accounts, flying in the face of savers’ usual apathy about moving their savings to get higher rates. The amounts being moved out of easy-access accounts and into fixed rate ones were down on March’s figures, but we might see this pick up again if the Bank of England hikes rates, pushing savings rates up further.
“NS&I continued to be a big beneficiary of savers’ money, as the security offered by the government-backed provider appealed to savers spooked by the US banking mini-crisis. NS&I has also significantly increased its rates, providing another juicy lure for savers. April saw another £1.6 billion paid into NS&I accounts, less than half the £3.8 billion paid in March but still meaty inflows. If savers continue to flock to the provider we could well see NS&I cut rates to stem the inflows, so it doesn’t overshoot its fundraising target from the government.”
Mortgages
“Rising mortgage interest rates have put the jitters up homeowners, with net mortgage borrowing falling in April, by £1.4 billion – marking the lowest level of net mortgage borrowing bar during the pandemic.
“What’s more, we saw approvals for house purchases fall, which is often used as an indicator of the future health of the housing market. This is before last week’s inflation figures sparked more panic in bond markets, pushing up mortgage interest rates. For many homeowners it’s just not an option to borrow more money and move to the next house on the ladder with interest rates where they are. And others are too nervous about the direction of rates and the housing market to make that next house move – so staying put seems the safest option.”
Source: Bank of England
