Rachel Reeves has officially announced significant adjustments to cash ISAs after much anticipation. However, other Budget declarations are poised to impact savers as well.
Starting from April 2027, the tax rate on savings interest is set to rise. Basic-rate taxpayers will have a £1,000 personal savings allowance annually before being subject to tax on interest earned. Any savings interest exceeding this threshold incurs a 20% tax, which is due to increase to 22%.
To breach the savings allowance, one would need over £22,000 saved in a top-rate easy-access savings account with a current rate of around 4.5% for a year. For higher-rate taxpayers, earning more than £500 in savings interest annually results in a 40% tax, which will be raised to 42% by April 2027. Additional rate taxpayers face a 45% tax on all savings interest, increasing to 47%.
ISA savings interest remains tax-free, with a yearly limit of £20,000 across all ISA accounts. From April 2027, individuals under 65 will only be allowed to deposit £12,000 annually into a cash ISA, while the overall ISA limit will remain at £20,000.
Under the various types of ISAs like cash, stocks and shares, Lifetime, and innovative finance, children have their Junior ISAs. Over-65s are unaffected by the new cap and can continue saving up to £20,000 yearly in a cash ISA.
Sarah Coles, head of personal finance at Hargreaves Lansdown, warned of potential tax exposure for those saving outside tax-efficient environments due to the tax rate hike. She emphasized the importance of utilizing cash ISAs to shield savings from tax, particularly as the change in cash ISA allowance will not be immediate, providing a window to maximize the allowance this year.
