Rachel Reeves has officially announced a reduction in the cash ISA limit, specifically affecting younger savers. During her Autumn Budget speech, the Chancellor disclosed that the annual cash ISA limit will be decreased from £20,000 to £12,000 starting in April 2027.
Despite the cut, the overall ISA limit will remain at £20,000. This means that individuals can allocate £12,000 to a cash ISA and the remaining £8,000 to a stocks and shares ISA. Alternatively, the full £20,000 allowance can be invested in stocks and shares.
However, individuals aged over 65 will not be subject to the new cap and can continue to save up to £20,000 annually in a cash ISA. Presently, the maximum amount that can be saved across all ISA accounts in a tax year is £20,000.
ISAs are savings accounts where interest earned is exempt from tax. In addition to the cash ISA adjustment, it has been confirmed that tax rates on savings interest in other accounts will increase from April 2027.
For basic-rate taxpayers, the tax rate on savings interest exceeding £1,000 annually will rise from 20% to 22%. Higher-rate taxpayers will see their tax rate increase from 40% to 42% when savings interest surpasses £500 per year. Additional rate taxpayers, currently paying 45% on all savings interest, will face a new rate of 47%.
Rachel Reeves stated that from April 2027, reforms to the ISA system will maintain the full £20,000 allowance, with £8,000 designated exclusively for investments, while individuals over 65 retain the full cash allowance. Financial institutions will also be empowered to provide savers with better advice on money management.
Sarah Coles, head of personal finance at Hargreaves Lansdown, expressed concern over the impact of the cash ISA limit reduction, highlighting the potential risk for savers to save outside tax-efficient environments and incur higher tax rates. She emphasized the importance of utilizing cash ISAs to shield savings from taxation.
Critics have questioned the effectiveness of the government’s efforts to promote investment through these changes, while building societies worry that the reduction in cash ISA limits could constrain mortgage availability by affecting deposit inflows.
Various types of ISAs exist, including cash ISAs, stocks and shares ISAs, Lifetime ISAs, and innovative finance ISAs, with children having access to Junior ISAs. While the overall ISA limit is £20,000, specific ISA types may have lower contribution limits, such as the £4,000 annual limit for a Lifetime ISA.
Recent statistics reveal that in 2023/24, the nation collectively contributed to 9.9 million cash ISA accounts.