Rachel Reeves has officially announced a reduction in the cash ISA limit, specifically affecting younger savers. During the Autumn Budget, the Chancellor revealed a decrease in the annual cash ISA limit from £20,000 to £12,000 starting in April 2027.
Despite the reduction, the overall ISA limit will remain at £20,000. This means individuals can allocate £12,000 to a cash ISA and £8,000 to a stocks and shares ISA, or invest the entire allowance in stocks and shares. However, individuals over the age of 65 will not be subject to the new cap and can continue saving up to £20,000 annually in a cash ISA.
An ISA is a tax-free savings account where interest earned is exempt from taxation. Alongside the cut in the cash ISA limit, there will be an increase in the tax rate on savings interest for other accounts from April 2027.
Basic-rate taxpayers currently pay 20% tax on savings interest exceeding £1,000 annually, which will rise to 22%. Higher-rate taxpayers, who pay 40% tax on interest exceeding £500 per year, will see their rate increase to 42%. Additional rate taxpayers, currently facing a 45% tax rate, will experience a hike to 47% from April 2027.
Rachel Reeves stated that starting April 2027, the ISA system will undergo reforms to maintain the full £20,000 allowance, with £8,000 exclusively designated for investment, while individuals aged over 65 will retain the full cash allowance. Financial institutions will be empowered to guide savers towards more favorable investment choices.
Sarah Coles, head of personal finance at Hargreaves Lansdown, expressed concern over the tax rise for savers, emphasizing the importance of utilizing cash ISAs for tax-free savings protection. The reduction in the cash ISA allowance may prompt more individuals to save outside tax-efficient environments, potentially exposing them to higher tax rates.
The Chancellor’s push to incentivize investment has faced skepticism regarding its impact on savings behavior. Building societies have raised concerns that cutting the cash ISA limit could limit mortgage availability, as cash ISAs contribute to funding lending activities.
Various types of ISAs, including cash ISAs, stocks and shares ISAs, Lifetime ISAs, and innovative finance ISAs, cater to different saving needs. Children also have access to Junior ISAs. Presently, individuals can save up to £20,000 across their ISA accounts, although certain ISAs, like the Lifetime ISA, have lower limits.
In the 2023/24 fiscal year, the country collectively contributed to 9.9 million cash ISA accounts, highlighting the widespread use of these tax-efficient savings vehicles.