Rachel Reeves has officially announced a reduction in the cash ISA limit, specifically impacting younger savers. During her Autumn Budget speech, the Chancellor disclosed that the annual cash ISA limit would decrease from £20,000 to £12,000 starting in April 2027.
Despite the cut, there will still be an overall £20,000 ISA limit, allowing savers to allocate £12,000 to a cash ISA and £8,000 to a stocks and shares ISA. Alternatively, individuals can invest the entire £20,000 in stocks and shares. The new cap will not affect individuals over 65, who will retain the ability to save up to £20,000 annually in a cash ISA.
An ISA is a tax-free savings account where interest earned is exempt from taxation. In addition to the cash ISA limit reduction, there will be an increase in the tax rate on savings interest for other accounts starting April 2027.
Basic-rate taxpayers, earning over £1,000 in savings interest annually, currently pay 20% tax, which will rise to 22%. Higher-rate taxpayers, with savings interest exceeding £500 per year, are subject to a 40% tax, which will elevate to 42%. Additional rate taxpayers face a 45% tax rate on all savings interest, increasing to 47% from April 2027.
Rachel Reeves stated that the ISA system would undergo reform in April 2027, maintaining the full £20,000 allowance, with £8,000 designated exclusively for investments, while individuals over 65 retain the full cash allowance. The changes aim to provide better financial advice and guidance to savers.
Sarah Coles, head of personal finance at Hargreaves Lansdown, expressed concerns about the tax rise for savers and emphasized the importance of utilizing cash ISAs to protect savings from taxation. The reduction in the cash ISA allowance may lead more individuals to save outside tax-efficient environments, exposing them to the new tax rate.
Critics have questioned whether the government’s efforts to encourage investment will impact saving habits, while building societies are wary of potential limitations on mortgage availability resulting from the cut in the cash ISA limit.
Various types of ISAs are available, including cash ISAs, stocks and shares ISAs, Lifetime ISAs, and innovative finance ISAs, with Junior ISAs catering to children. Currently, individuals can save up to £20,000 across their ISA accounts, with some ISAs having lower contribution limits, such as the £4,000 annual limit for a Lifetime ISA.
In the fiscal year 2023/24, data indicates that the nation contributed to 9.9 million cash ISA accounts.