Cash Isas saved Britons £2.79bn in tax in just one year... but that is set to drop as Labour slashes allowance

Tax relief on money held in cash Isas doubled in just one year as savers stuffed money into the accounts to avoid the taxman's clutches. Households saved £2.79billion in tax on savings interest in the 2024-25 tax year by using the tax-free wrappers, according to HM Revenue and Customs figures.It was more than double the £1.3billion tax relief that savers saw in 2023-24 and 13 times as much as was saved six years previously.However, the tax benefits of Isas are set to be reduced for many from next year, when the maximum amount that can be saved in a cash Isa will be slashed from £20,000 to £12,000 for under-65s.According to stockbroker AJ Bell, which obtained the HMRC figures via a Freedom of Information request, the climb in tax savings in 2024-25 was driven by higher interest rates on savings and frozen income tax thresholds. A mix of high savings rates and frozen thresholds has triggered the bumper tax savingHigh savings rates make Isa wrapper vitalHigher interest rates recently offered on savings means families have naturally saved more in tax through using Isas than in previous years, AJ Bell said. If they use a normal savings account and not an Isa, basic rate taxpayers get a £1,000 savings interest allowance that is tax-free each year. Any interest above this is charged at their marginal rate of income tax.For higher-rate taxpayers the allowance is £500, while additional rate taxpayers don't have any tax-free savings interest allowance.However, put this money in a cash Isa instead of a typical savings account and all of your returns are free of tax. It has not been uncommon in the past few years for top-paying savings accounts to offer more than 4 per cent interest, even topping 5 per cent in some cases. Earning a bigger return on savings meant it was more important than ever to protect those gains from tax. Savvy savers who placed their money in a cash Isa have stopped billions of pounds falling into the taxman's hands.Sarah Coles says: 'Back in the age of super-low rates, while the economy wrestled with the pandemic, savers were barely making anything on their savings. In 2021-22 they saved just £75million in tax on their savings interest. 'The hiking of rates in recent years has seen that soar.'Income tax thresholds have also been frozen since 2021, which means that as workers' pay has increased, many have been dragged into higher tax bands.As they are pulled into these higher tax bands, they must pay a higher rate of tax on savings interest and their tax-free savings allowance is either halved or completely disappears.It means that the cash Isa shelter has been vital in recent years.Looming cash Isa cut for under-65sIt's likely that this year will also be a bumper one for cash Isa tax savings. Savers are once again stuffing their cash wrappers with as much money as they can ahead of a punitive cut to the allowance next year.Former chancellor Rachel Reeves last year announced that the cash Isa allowance would be slashed from £20,000 to £12,000 in April 2027 for under-65-year-olds in a major blow for savers.The stocks and shares Isa allowance will stay at £20,000 as the Exchequer tries to force savers to invest in British equities.It means that those with more than £12,000 to save will be forced to either turn to stocks and shares Isas, or put the remainder of their cash in a taxable savings account.Savers adding cash to their accounts now will bolster their tax relief. Investment Isas see tax savings climb It's not just cash Isa holders that have seen soaring tax savings – stocks and shares Isa investors have, too.Dividends and capital gains are earned free of tax inside investment Isas.In 2024-25, Isa investors saw a £5.78billion dividend tax relief, up from £4.32billion the previous year, the HMRC figures show. Meanwhile, they saved £1.18 in capital gains tax, a rise from £1.04 in 2023-24.Investors have been choosing Isas over regular investment accounts as a raft of tax changes has threatened to eat into their returns.Rachel Reeves hiked CGT rates from 10 per cent to 18 per cent for basic rate taxpayers in October 2024, meanwhile the higher rate climbed from 20 to 24 per cent.The CGT free allowance has also been dramatically slashed from £12,300 in 2022-23 to £3,00 by 2024-25.Dividend tax rates also climbed by two percentage points in April while the tax-free allowance for payouts fell from £2,000 to £500.This means that the tax relief available inside stocks and shares Isas has been bolstered. Coles adds: 'The taxman's grip on our investments has also been tightening. But holding investments within the Isa wrapper protects you from both taxes.'The best cash IsasProducts featured are independently selected by This is Money's specialist journalists. If you open an account using links which have an asterisk, This is Money will earn an affiliate commission. We do not allow this to affect our editorial independence.A cash Isa is an essential account for savers that protects you from tax on your interest.This means that your pot can grow without tax dragging it back - something that is especially important for the growing number of 40 per cent taxpayers.This is Money's savings experts scour the market for the real best cash Isa deals - looking for top rates and accounts that come without catches to trip you up. Below you can find a run down of our top deals and you can check all the best cash Isa rates in our savings tables.Trading 212* - easy access - 4.56% (0.96% 12-month bonus) - Facts: £1 to open - Transfers in: Yes (bonus rate applies only on contributions made this tax year)- Flexible: YesHargreaves Lansdown* - easy access - 4.52% - Facts: £1 to open- Transfers in: Yes (but must transfer to its stocks and shares Isa first)- Flexible: NoCoventry BS - one-year fix - 4.60% - Facts: £1 to open- Transfers in: Yes - Flexible: NoRCI Bank - two-year fix - 4.65%- Facts: £1,000 to open- Transfers in: Yes- Flexible: NoMoneybox - cash Lifetime Isa - 4.45% - Facts: £1 to open, 1.65% bonus for 12 months- Transfers in: Yes (not partial transfers)- Flexible: No > Read more in our full best cash Isas guide