Rachel Reeves has officially announced a reduction in the cash ISA limit, specifically affecting younger savers. The Chancellor unveiled this change during her Autumn Budget, revealing that the annual cash ISA limit will decrease from £20,000 to £12,000 starting in April 2027.
Despite the cut, the overall ISA limit will remain at £20,000, allowing savers to split their allowance between a cash ISA and a stocks and shares ISA. Over-65s are exempt from the new cap and can continue to save up to £20,000 annually in a cash ISA. Additionally, all individuals can currently save up to £20,000 per tax year across their ISA accounts.
An ISA serves as a tax-free savings account where interest earned remains untaxed. Alongside the reduction in the cash ISA limit, it has been confirmed that the tax rate on savings interest for other accounts will increase from April 2027.
Basic-rate taxpayers currently pay 20% tax on savings interest exceeding £1,000 annually, which will rise to 22%. Higher-rate taxpayers face a tax rate increase from 40% to 42%, while additional rate taxpayers will see their tax rate climb from 45% to 47% starting April 2027.
Rachel Reeves stated that starting April 2027, reforms to the ISA system will maintain the full £20,000 allowance, with £8,000 earmarked exclusively for investment, while over-65s retain the entire cash allowance. Financial institutions will be empowered to offer guidance to help savers make sound financial choices.
Sarah Coles, head of personal finance at Hargreaves Lansdown, expressed concern over the significant tax rise for savers and highlighted the importance of utilizing cash ISAs for tax protection. The changes are expected to impact saving habits and access to mortgages, as building societies rely on deposits like cash ISAs for lending purposes.
Various types of ISAs, including cash ISAs, stocks and shares ISAs, Lifetime ISAs, and innovative finance ISAs, cater to different saving needs. Children also have Junior ISAs available. While the current ISA limit is £20,000, specific types of ISAs may have lower contribution limits, such as the £4,000 limit for a Lifetime ISA per tax year.
Recent data indicates that in 2023/24, the nation collectively contributed to 9.9 million cash ISA accounts.
