A surprise growth spurt has been announced for the junior Isa allowance in the Budget. It will more than double on Saturday 6 April 2020, from £4,368 to £9,000.
New Chancellor Rishi Sunak revealed this dramatic change to junior Isa savings in his first Budget after taking over from Sajid Javid less than a month ago.
Child benefit is going up by the rate of inflation, from £20.70 a week for the eldest or only child to £21.05. Parents or carers will get £13.95 a week for any additional children, up from £13.70.
Adult Isa limits will remain unchanged at £20,000 for the fourth year running. Nor were there any changes to the lifetime Isa allowance or tax-free personal savings allowances.
The news came hours after the Bank of England announced a 0.5% cut to the base rate, from 0.75% to 0.25%, as an emergency response to the spread of coronavirus. This is a significant drop which could impact many savers if banks choose to pass the rate cut on to their customers.
Here, we explain the junior Isa and child benefit changes, how to get the most out of your savings and what the base rate cut might mean for savers.
For a full round-up of the Chancellor’s announcement, visit our Budget 2020 live feed.
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Budget 2020: Junior Isa allowance
Junior Isas are tax-free savings accounts for under-18s. They can be opened by parents or guardians of children born on or after 3 January 2011, or before 31 August 2002.
The surprise £4,362 jump in the allowance is much greater than the same time last year, when it went up by just £108 in line with CPI inflation. The same applies to child trust funds.
Though the change wasn’t mentioned in Mr Sunak’s speech, the Budget red book, which was published afterwards, says: ‘By saving towards their future, families can give children a significant financial asset when they reach adulthood – helping them into further education, training, or work.
‘JISAs and child trust funds are tax-advantaged accounts for children, designed to encourage a long-term savings habit.’
Money placed into a junior Isa can be accessed once the child turns 18. After this point, it becomes a full Isa subject to the adult threshold of £20,000.
- Find out more: the best junior cash Isas
How the junior Isa allowance has changed
- Find out more: Junior Isa rules and allowances
Child benefit goes up
Child benefit rates for the 2020-21 tax year have risen by 1.7%, the rate of inflation in September 2019.
Eligible parents or guardians will receive £21.05 for their eldest child, up from £20.70, and £13.95 for any additional children, up from £13.70.
Child benefit is a monthly payment from the government to anyone who has primary responsibility for a child – you don’t necessarily need to be the child’s parent to receive it.
The table below shows child benefit rates for 2019-20.
|Child benefit rates 2020-21|
|Number of children||Weekly child benefit||Annual child benefit|
Adult Isa allowance
The allowance for adult Isas for 2020-21 remains static at £20,000 for the fourth year in a row.
Historically, the Isa allowance has tended not to budge for several years and then has leapt up by several thousands. The allowance spent 11 years at £7,000 after this form of savings was first introduced in 1999. It saw big jumps in the Aprils of 2010, 2014 and 2017.
Remember that your allowance does not carry over into the next tax year, so consider topping up where possible.
- Find out more: compare Isas with Which? Money Compare
Adult Isa allowance over time
- Find out more: are Isas still worthwhile?
What the base rate cut could mean for savers
This morning the Bank of England made an unscheduled announcement that it was reducing the base rate – which impacts interest rates for savers and borrowers – from 0.75% to 0.25%. This takes it back to the record low level last seen in October 2017.
Although it is intended as a temporary measure to bolster businesses and households impacted by Covid-19, it could trigger cuts in variable savings rates and even lower rates on yet-to-be-launched fixed-rate accounts. Under this scenario, the winners will be savers already on fixed-rate deals.
The news followed an announcement yesterday that some banks will allow savers to access cash locked up in fixed-term accounts if they need it due to the coronavirus.
- Find out more: how to find the best savings account
Lifetime Isa rates are set to remain the same for the upcoming tax year.
Introduced in April 2017, the lifetime Isa is a tax-free savings or investments account that allows adults aged 18-39 at the time of opening the account to save up to £4,000 a year.
For every £4 saved, the government will add £1 (worth up to £1,000 every tax year until the saver turns 50) – as long as the money is either used to buy the saver’s first-ever property or put towards their retirement.
The bonus is paid every month, allowing savers to benefit from compound growth.
- Find out more: what is a lifetime Isa?
Isa limits and allowances over time
The table below shows the historical Isa allowances since the 2016/17 tax year.
|Adult Isa allowance||Lifetime Isa allowance||Junior Isa allowance|
- Find out more: what are the different types of Isa?
Personal savings allowance untouched
No changes have been made to the personal savings allowance, which was introduced in April 2016.
This allowance allows you to earn interest of up to £1,000 tax-free if you’re a basic-rate (20%) taxpayer, or £500 if you’re a higher-rate (40%) taxpayer.
Additional-rate taxpayers – people who earn over £150,000 – don’t receive a personal savings allowance and will have to pay tax on all interest they earn.
The examples below show how the personal allowance works in practice for basic and higher-rate taxpayers:
- You earn £20,000 a year and get £250 in account interest: you won’t pay any tax because it’s less than your £1,000 allowance.
- You earn £20,000 a year and get £1,500 in account interest: you won’t pay tax on the first £1,000 of interest but will pay basic-rate tax (20%) on the £500 above this.
- You earn £51,000 a year and get £250 in account interest: you won’t pay any tax because it’s less than your £500 allowance.
- You earn £51,000 a year and get £1,100 in account interest: you won’t pay tax on the first £500, but will pay higher-rate tax (40%) on the £600 above this.
Find out more: compare savings accounts with Which? Money Compare