Rachel Reeves has officially announced significant adjustments to cash ISAs after much anticipation. However, there are other Budget declarations that could affect savers. Starting from April 2027, the tax rate on savings interest will rise. Basic-rate taxpayers can earn up to £1,000 in savings interest annually before incurring tax, known as the personal savings allowance.
The current tax rate of 20% on savings interest exceeding this threshold will increase to 22%, requiring tax payment on interest earned above the limit. For instance, depositing funds into the 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.
Higher-rate taxpayers, who face a 40% tax on savings interest exceeding £500 annually, will see this rate rise to 42% from April 2027. Additional rate taxpayers, subject to a 45% tax on all savings interest, will experience an increase to 47%.
Savings interest in an ISA remains tax-free. Currently, individuals can save up to £20,000 per tax year across their ISA accounts. From April 2027, individuals under 65 will be restricted to depositing £12,000 annually into a cash ISA, maintaining the overall £20,000 ISA limit. However, those aged 65 and above can continue to save up to £20,000 per tax year into a cash ISA.
The main ISA types include cash ISAs, stocks and shares ISAs, Lifetime ISAs, and innovative finance ISAs. Children have their own Junior ISAs. Sarah Coles, head of personal finance at Hargreaves Lansdown, warned of the potential for more people to save outside tax-efficient environments and face the new tax rate. She emphasized the importance of utilizing cash ISAs to protect savings from taxation, urging individuals to leverage their allowance before the cash ISA limit changes.