Rachel Reeves has officially announced significant adjustments to cash ISAs after much anticipation. However, the alterations in cash ISAs are not the only changes from the Budget that might affect savers.
Starting from April 2027, the tax rate on savings interest will rise. Basic-rate taxpayers will have a £1,000 personal savings allowance before incurring taxes on savings interest. Any savings interest exceeding this threshold will be taxed at a 22% rate, up from the current 20%.
For instance, individuals would need over £22,000 in a top-rate easy-access savings account, currently offering around 4.5%, to risk surpassing their savings allowance for the year. Higher-rate taxpayers, subject to a 40% tax on savings interest exceeding £500 annually, will see this rate climb to 42% starting April 2027. Additional rate taxpayers, already taxed at 45% on all savings interest, will face a 47% tax rate.
ISA accounts remain a tax-efficient option as savings interest within an ISA is not taxed. Presently, individuals can save up to £20,000 yearly across various ISA accounts. However, from April 2027, individuals under 65 will be restricted to saving £12,000 per tax year in a cash ISA.
The overall ISA limit remains at £20,000, allowing flexibility to distribute savings between different types of ISAs. Individuals aged 65 and over can continue to save up to £20,000 annually in a cash ISA without any impact from the new cap.
Various types of ISAs include cash ISAs, stocks and shares ISAs, Lifetime ISAs, and innovative finance ISAs. Additionally, children have Junior ISAs tailored for them.
Sarah Coles, head of personal finance at Hargreaves Lansdown, expressed concerns about individuals potentially saving outside tax-efficient environments due to the tax rate changes. She emphasized the importance of utilizing cash ISAs to safeguard savings from taxation, highlighting that the adjustment to the cash ISA allowance will not be immediate, providing an opportunity to maximize the allowance this year.