Rachel Reeves has officially announced significant modifications to cash ISAs after much speculation. However, this is not the sole Budget declaration that could affect savers.
Starting 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 tax, known as the personal savings allowance. The current 20% tax on savings interest exceeding this amount will climb to 22%, applying to interest earned beyond the threshold.
For instance, depositing funds in the current top-rate easy-access savings account at around 4.5% would necessitate having over £22,000 saved for a year to risk breaching the savings allowance. Conversely, higher-rate taxpayers, taxed at 40% on savings interest exceeding £500 annually, will see this rate rise to 42%. Additional rate taxpayers, currently taxed at 45% on all savings interest, will face a 47% tax rate.
ISA savings interest remains tax-free, with the current annual limit set at £20,000 across multiple ISAs. Although some ISAs have lower caps, such as £4,000 for a Lifetime ISA yearly, the Chancellor has announced that individuals under 65 can only deposit £12,000 annually into a cash ISA starting April 2027. Nonetheless, the overall ISA limit will remain at £20,000, allowing a mix of cash and stocks and shares ISA contributions.
Individuals over 65 will not be impacted by the new cap and can continue to save up to £20,000 per tax year in a cash ISA. The primary ISA types include cash ISAs, stocks and shares ISAs, Lifetime ISAs, and innovative finance ISAs, with Junior ISAs available for children.
Sarah Coles, head of personal finance at Hargreaves Lansdown, expressed concerns about more individuals saving outside tax-efficient environments and facing the new tax rates. While the personal savings allowance safeguards the initial £1,000 for basic-rate taxpayers and £500 for higher-rate taxpayers, any excess interest will incur higher taxes. Coles emphasized the importance of utilizing cash ISAs for tax protection, highlighting that the adjustment to the cash ISA allowance will not be immediate, allowing individuals to maximize their allowance this year.