Rachel Reeves has officially announced significant alterations to cash ISAs after much anticipation. However, other Budget declarations could also affect savers.
Starting April 2027, the tax rate on savings interest is set to rise. Basic-rate taxpayers have a £1,000 personal savings allowance before incurring tax on interest. Any interest above this limit incurs a 20% tax, which will increase to 22%.
For instance, with a top easy-access savings account rate of approximately 4.5%, exceeding £22,000 in savings for a year would breach the allowance for basic-rate taxpayers. Higher-rate taxpayers, who face a 40% tax on earnings over £500 in savings interest annually, will see this rate increase to 42%. Additional rate taxpayers, subject to a 45% tax on all savings interest, will experience a hike to 47%.
ISA savings interest remains tax-free, with a current annual limit of £20,000 across all ISA accounts. However, from April 2027, individuals under 65 can only deposit £12,000 annually into a cash ISA. The overall ISA limit remains at £20,000, allowing diversification between cash and stocks and shares ISAs.
The revised cap won’t affect over-65s, who can continue saving up to £20,000 yearly in a cash ISA. ISAs include cash, stocks and shares, Lifetime, and innovative finance options, along with Junior ISAs for children.
Sarah Coles, head of personal finance at Hargreaves Lansdown, expressed concerns about individuals potentially saving outside tax-efficient environments, leading to exposure to the new tax rate. She emphasized the importance of utilizing cash ISAs for tax protection, highlighting the opportunity to maximize allowances before the changes take effect.
