Rachel Reeves has officially announced a reduction in the cash ISA limit, specifically affecting 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, the overall ISA limit of £20,000 remains intact, allowing savers to allocate £12,000 to a cash ISA and the remaining £8,000 to a stocks and shares ISA. Alternatively, individuals could utilize the full allowance for stocks and shares ISAs.
Notably, individuals over the age of 65 will not be subject to the new cap and can continue to save up to £20,000 annually in a cash ISA. The tax-free nature of ISAs, where interest earnings are exempt from taxation, is a key benefit. Additionally, adjustments in the tax rates for savings interest have been confirmed for April 2027.
Basic-rate taxpayers currently pay 20% tax on savings interest exceeding £1,000 annually, which will increase to 22%. Higher-rate taxpayers face a 40% tax on savings interest exceeding £500 per year, set to rise to 42%. For additional rate taxpayers, the tax rate on all savings interest, currently at 45%, will elevate to 47% next year.
The alterations proposed by Rachel Reeves aim to preserve the £20,000 ISA allowance while earmarking £8,000 exclusively for investments, with individuals above 65 retaining the full cash allowance. Sarah Coles, Head of Personal Finance at Hargreaves Lansdown, expressed concern regarding the impact of the cash ISA allowance reduction, emphasizing the importance of tax-efficient saving strategies.
Furthermore, the Chancellor’s push to encourage investment has drawn skepticism about its efficacy in altering saving behaviors. Building societies have raised concerns about the potential impact of reducing the cash ISA limit on mortgage availability, as they heavily rely on deposits such as cash ISAs for lending operations.
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. While the current ISA limit stands at £20,000 across all accounts, certain ISAs impose lower caps, such as the £4,000 limit for Lifetime ISAs per tax year.
Recent statistics reveal that in 2023/24, the nation collectively contributed to 9.9 million cash ISA accounts.