Rachel Reeves has officially announced a reduction in the cash ISA limit, specifically targeting younger savers. During her Autumn Budget address, the Chancellor disclosed that the annual cash ISA limit will decrease from £20,000 to £12,000 starting in April 2027. Despite this cut, individuals will still have the option to utilize the full £20,000 ISA allowance, with the ability to allocate £12,000 to a cash ISA and £8,000 to a stocks and shares ISA, or invest the entire sum in stocks and shares.
However, individuals aged over 65 will not be impacted by this adjustment and can continue to save up to £20,000 annually in a cash ISA. The tax-free nature of ISAs remains unchanged, but it has been confirmed that the tax rate on savings interest for non-ISA accounts will increase from April 2027.
Basic-rate taxpayers currently face a 20% tax on savings interest exceeding £1,000 annually, which will rise to 22%. Higher-rate taxpayers, on the other hand, are taxed at 40% on savings interest exceeding £500 per year, increasing to 42%. Additional rate taxpayers, who are taxed at 45% on all savings interest, will see their rate climb to 47% from April 2027.
Rachel Reeves emphasized that the ISA system will undergo reforms in April 2027, maintaining the full £20,000 allowance but allocating £8,000 exclusively for investment, with individuals over 65 retaining the full cash allowance. She also highlighted improvements in financial advice and guidance to help banks direct savers towards better investment choices.
Sarah Coles, head of personal finance at Hargreaves Lansdown, expressed concern over the tax rise for savers resulting from the Budget’s impact on the cash ISA allowance. Coles emphasized the importance of utilizing cash ISAs for tax protection, especially with the forthcoming changes. The Chancellor has faced pressure to promote investment, with critics questioning the potential impact on saving habits. Building societies have raised concerns about reduced mortgage availability due to the cut in the cash ISA limit, as these institutions rely on deposits like cash ISAs for lending.
Various types of ISAs are available, including cash ISAs, stocks and shares ISAs, Lifetime ISAs, and innovative finance ISAs, with children having access to Junior ISAs. While the current overall ISA limit is £20,000, certain ISAs have lower contribution limits, such as the £4,000 annual cap on Lifetime ISAs. Recent data indicates that in 2023/24, the UK saw 9.9 million cash ISA accounts in use.
