Rachel Reeves has officially announced significant alterations to cash ISAs after much anticipation, but changes in the Budget could also impact savers. Starting in April 2027, the tax rate on savings interest will rise. Basic-rate taxpayers can earn up to £1,000 in savings interest annually before facing taxation, known as the personal savings allowance. Currently set at 20%, the tax rate on savings interest exceeding this threshold will increase to 22%, requiring individuals to pay tax on the excess interest earned.
For instance, depositing funds in a top-rate easy-access savings account at 4.5% would necessitate having over £22,000 saved for a year to potentially breach the savings allowance. Conversely, higher-rate taxpayers, subject to a 40% tax when earning over £500 in savings interest annually, will see this rate climb to 42% from April 2027. Additional rate taxpayers, who currently pay 45% tax on all savings interest, will face a 47% tax rate.
ISA savings interest remains tax-free, allowing individuals to save up to £20,000 each tax year across various ISA accounts. However, starting April 2027, individuals under 65 will be limited to saving £12,000 annually into a cash ISA. Despite this cap, the overall ISA limit of £20,000 remains unchanged, permitting a combination of cash and stocks and shares ISAs. Over-65s will retain the ability to save up to £20,000 yearly into a cash ISA without any impact.
Common ISA types 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, highlighted the importance of utilizing tax-efficient cash ISAs to shield savings from taxation, especially with the upcoming changes. While the personal savings allowance safeguards a portion of interest, maximizing cash ISA allowances before adjustments take effect is advised.