After much speculation, Rachel Reeves has officially announced significant modifications to cash ISAs. However, this is not the sole Budget declaration that could impact savers. Starting from April 2027, the tax rate on savings interest will rise. Basic-rate taxpayers will have a £1,000 personal savings allowance before incurring tax on savings interest.
Currently set at 20%, the tax on savings interest exceeding this limit will increase to 22%. Individuals pay tax on interest earned over this threshold. For instance, saving in a top-rate easy-access account at around 4.5% would require over £22,000 saved for a year to potentially exceed the allowance.
Higher-rate taxpayers face a lower threshold, with 40% tax applying when savings interest surpasses £500 annually. This rate will elevate to 42% in April 2027. Moreover, additional rate taxpayers, subject to 45% tax on all savings interest, will see this rate climb to 47%.
ISA savings interest remains tax-free. Currently, individuals can save £20,000 per tax year across various ISA accounts. However, the Chancellor has proposed a change for under-65 savers, limiting cash ISA contributions to £12,000 per tax year from April 2027. Nevertheless, the overall ISA limit of £20,000 still applies, allowing a mix of cash and stocks and shares ISAs.
The cap will not affect over-65s, who can continue saving up to £20,000 annually in a cash ISA. Various 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 potential risk of more individuals saving outside tax-efficient environments and facing the new tax rate. While the personal savings allowance safeguards the initial £1,000 for basic-rate taxpayers and £500 for higher-rate taxpayers, exceeding this limit will lead to a tax increase.
Coles emphasized the importance of leveraging cash ISAs for tax protection, stating that the alteration in the cash ISA allowance will not be immediate, allowing savers to maximize their allowance this year.
