Rachel Reeves has officially announced significant adjustments to cash ISAs after much anticipation. However, other Budget declarations are also set to impact savers. Starting in April 2027, the tax rate on savings interest will be raised. Basic-rate taxpayers will have a £1,000 personal savings allowance before incurring tax on interest. Any savings interest above this threshold is currently taxed at 20%, but this rate will climb to 22%.
To give an example, if you were to save in a top easy-access savings account with a 4.5% interest rate, you would need over £22,000 saved for a year to exceed your savings allowance. For higher-rate taxpayers, who face a 40% tax on savings interest over £500 annually, this rate will increase to 42%. Additionally, additional rate taxpayers, currently taxed at 45% on all savings interest, will see this rate climb to 47%.
ISA savings remain tax-free. Presently, individuals can save up to £20,000 per tax year across various ISA accounts. However, starting April 2027, individuals under 65 will have a reduced cash ISA limit of £12,000 per tax year. Despite this change, the overall ISA limit of £20,000 will remain, allowing for a combination of cash and stocks and shares ISAs.
Individuals over 65 will not be affected by the new limit and can continue to save up to £20,000 annually in a cash ISA. Various types of ISAs exist, including 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, emphasized the importance of utilizing tax-efficient savings options like cash ISAs to shield savings from taxation. While the personal savings allowance offers initial protection, taxpayers may face higher tax bills beyond the threshold. Coles stressed the ongoing opportunity to maximize ISA allowances before the cash ISA limit adjustment takes effect.