Rachel Reeves has officially announced a reduction in the cash ISA limit, specifically affecting younger savers. The Chancellor disclosed in her Autumn Budget that the yearly cash ISA limit will be decreased from £20,000 to £12,000 starting in April 2027.
Despite the cut, the overall ISA limit of £20,000 will remain unchanged. This adjustment allows savers to allocate £12,000 to a cash ISA and the remaining £8,000 to a stocks and shares ISA, or utilize the entire allowance in stocks and shares. Notably, individuals aged over 65 will not be impacted by this adjustment and can continue saving up to £20,000 annually in a cash ISA. Presently, savers can deposit up to £20,000 per tax year across all their ISA accounts.
An ISA is a tax-free savings account where the interest earned remains untaxed. Alongside the reduction in the cash ISA limit, there are plans to increase the tax rate on savings interest from April 2027.
Under the new rules, basic-rate taxpayers will face a 22% tax on savings interest exceeding £1,000 annually, up from the current 20%. Similarly, higher-rate taxpayers will see their tax rate rise from 40% to 42% when their savings interest surpasses £500 per year. Additionally, additional rate taxpayers, currently taxed at 45%, will experience a hike to 47% on all savings interest from April 2027.
Rachel Reeves stated that as of April 2027, the ISA system will be reformed to maintain the full £20,000 allowance, with £8,000 exclusively designated for investments while preserving the full cash allowance for individuals over 65. She also highlighted improvements in financial advice and guidance to assist banks in steering savers towards better financial choices.
Sarah Coles, head of personal finance at Hargreaves Lansdown, expressed concerns about the tax implications for savers due to the cash ISA limit cut. She emphasized the importance of utilizing cash ISAs for tax protection, especially given the forthcoming tax rate adjustments.
Critics have questioned the impact of these changes on saving behaviors, while building societies have raised concerns over potential limitations on mortgage availability resulting from the reduced cash ISA limit, which contributes to their lending activities.
Common types of ISAs include cash ISAs, stocks and shares ISAs, Lifetime ISAs, and innovative finance ISAs. Children also have Junior ISAs tailored for them. Current regulations allow individuals to save up to £20,000 across various ISA accounts, with certain ISAs having lower limits, such as the £4,000 yearly cap on Lifetime ISAs.
Recent statistics indicate that in 2023/24, 9.9 million cash ISA accounts were active, reflecting the popularity of these savings vehicles among the public.