Rachel Reeves has officially announced significant modifications to cash ISAs after much anticipation. However, the alterations in the Budget could have broader implications for savers beyond this.
Starting April 2027, the tax rate on savings interest will rise. Basic-rate taxpayers will have a personal savings allowance of £1,000 annually before incurring taxes on savings interest. Any interest above this threshold will be taxed at 20%, increasing to 22% in the future.
For instance, if you save in a top-rate easy-access savings account at 4.5%, you would need over £22,000 saved for a year to potentially exceed your savings allowance. Higher-rate taxpayers, who pay 40% tax on savings interest exceeding £500 annually, will see this rate climb to 42% in April 2027. Additional rate taxpayers face a 45% tax, which will elevate to 47%.
Tax on savings interest in an ISA is exempt. Currently, individuals can save up to £20,000 per tax year across various ISA accounts. However, from April 2027, individuals under 65 can only contribute £12,000 annually to a cash ISA.
The overall ISA limit remains at £20,000, providing flexibility to save across different types. Over-65s are unaffected by the new cap and can continue to save up to £20,000 yearly into a cash ISA.
Types of ISAs include cash ISAs, stocks and shares ISAs, Lifetime ISAs, and innovative finance ISAs, with Junior ISAs available for children.
Sarah Coles, head of personal finance at Hargreaves Lansdown, expressed concerns about more people saving outside tax-efficient environments, potentially facing higher tax rates. She emphasized the importance of utilizing cash ISAs to shield savings from taxes.
The adjustment to the cash ISA allowance will not be immediate, offering individuals a chance to maximize their allowances this year.
