Rachel Reeves has officially announced significant alterations to cash ISAs after a period of speculation. However, this change is not the only Budget update that could impact savers.
Starting from April 2027, the tax rate on savings interest will increase. Basic-rate taxpayers can earn up to £1,000 in savings interest annually before being subject to taxation, known as the personal savings allowance.
Currently set at 20% for savings interest exceeding this threshold, the tax rate will rise to 22%. Any savings interest earned beyond this limit will be taxed accordingly.
For instance, depositing funds into the top-rate easy-access savings account at 4.5% would require savings exceeding £22,000 for a year to potentially breach the savings allowance.
Conversely, higher-rate taxpayers, taxed at 40% on savings interest exceeding £500 annually, will see this rate increase to 42%. Additional rate taxpayers, taxed at 45% on all savings interest, will face a hike to 47%.
ISA savings interest remains tax-free, with a current annual limit of £20,000 across all ISA accounts. The Chancellor’s recent announcement imposes a new restriction on cash ISAs, limiting individuals under 65 to saving £12,000 yearly.
Despite this change, the overall ISA limit remains at £20,000, allowing flexibility such as saving £12,000 in a cash ISA and £8,000 in a stocks and shares ISA.
Individuals over 65 are unaffected by the new cash ISA cap and can continue to save up to £20,000 annually as before.
Notably, ISAs encompass various types including cash ISAs, stocks and shares ISAs, Lifetime ISAs, and innovative finance ISAs, with children having Junior ISAs.
Sarah Coles, head of personal finance at Hargreaves Lansdown, cautioned about potential tax exposure outside tax-efficient environments due to the new tax rates. She emphasized the importance of utilizing cash ISAs to shield savings from taxation, advising savers to take advantage of the current allowance before any changes take effect.