Rachel Reeves has officially announced a reduction in the cash ISA limit, specifically affecting younger savers. The Autumn Budget delivered by the Chancellor disclosed a decrease in the annual cash ISA limit from £20,000 to £12,000 starting April 2027.
Despite the cut, the overall ISA limit remains at £20,000. This adjustment allows individuals to allocate £12,000 to a cash ISA and £8,000 to a stocks and shares ISA, or the full £20,000 into stocks and shares. However, older savers aged 65 and above are exempt from this new limitation and can continue to save up to £20,000 annually in a cash ISA.
ISAs are savings accounts where interest earnings are tax-free. Alongside the reduction in cash ISA limits, there will be an increase in the tax rate on savings interest for other accounts effective April 2027. Basic-rate taxpayers will see their tax rate on savings interest rise from 20% to 22% when exceeding £1,000 in annual savings interest. Higher-rate taxpayers will experience an increase from 40% to 42%, and additional rate taxpayers will face a hike from 45% to 47% on all savings interest.
Rachel Reeves stated that starting April 2027, the ISA system will undergo reform, maintaining the full £20,000 allowance while designating £8,000 exclusively for investments, with over-65s still enjoying the full cash allowance. This change aims to guide savers towards better financial decisions through improved financial advice and guidance provided by banks.
Sarah Coles, head of personal finance at Hargreaves Lansdown, expressed concern over the significant tax rise for savers resulting from the Budget’s proposed cut to the cash ISA allowance. She highlighted the importance of leveraging cash ISAs to shield savings from tax and emphasized the necessity of utilizing the current allowance before the adjustment takes effect.
Critics have questioned the effectiveness of encouraging investment to alter saving habits, with building societies warning that reducing the cash ISA limit could impact the availability of mortgages, as they rely on deposits like cash ISAs for lending.
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 their own version known as Junior ISAs. While the current ISA allowance is £20,000 across all accounts, certain ISAs have lower limits, such as the £4,000 limit for a Lifetime ISA per tax year.
In the fiscal year 2023/24, data revealed that the nation contributed to 9.9 million cash ISA accounts.
