Rachel Reeves has officially announced significant adjustments to cash ISAs after prolonged speculation. However, this isn’t the sole Budget declaration that might affect savers.
Starting from April 2027, the tax rate on savings interest will rise. Basic-rate taxpayers can earn up to £1,000 in savings interest annually before being liable for tax, known as the personal savings allowance.
The current tax rate of 20% on savings interest exceeding this threshold will increase to 22%. Tax is applicable on savings interest exceeding this limit.
For instance, depositing savings in the current top-rate easy-access savings account at around 4.5% would require over £22,000 saved for a year to potentially breach the savings allowance.
Higher-rate taxpayers face lower limits, with the tax rate of 40% kicking in when earning over £500 in savings interest annually. This rate will escalate to 42% from April 2027. Additional rate taxpayers are subject to a 45% tax rate on all savings interest, set to rise to 47%.
Tax is not charged on savings interest in an ISA. Presently, individuals can save up to £20,000 per tax year across all ISA accounts.
Following the Chancellor’s announcement, individuals under 65 will only be allowed to deposit £12,000 per tax year into a cash ISA from April 2027, while the overall ISA limit remains at £20,000.
Over-65s are unaffected by the new cap and can continue saving up to £20,000 annually in a cash ISA.
The primary types of ISAs include 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, emphasized the importance of utilizing cash ISAs for tax protection amidst the impending tax rate changes. She highlighted the continued relevance of the personal savings allowance for basic and higher-rate taxpayers and advised utilizing the current cash ISA allowance before potential adjustments take effect.