Rachel Reeves has officially announced a reduction in the cash ISA limit, specifically targeting younger savers. During her Autumn Budget speech, the Chancellor disclosed that starting from April 2027, the annual cash ISA limit will be decreased from £20,000 to £12,000.
Despite the cut, the overall ISA limit remains at £20,000, allowing individuals to allocate £12,000 to a cash ISA and £8,000 to a stocks and shares ISA. Alternatively, savers can invest the full £20,000 in stocks and shares. Notably, individuals aged over 65 are exempt from this new limit and can continue saving up to £20,000 annually in a cash ISA.
An ISA serves as a tax-free savings account where interest earned is not subject to taxation. Alongside the reduction in the cash ISA limit, there will be an increase in the tax rate on savings interest for other accounts starting April 2027.
The adjustments entail a rise in tax rates for savings interest. Basic-rate taxpayers, earning over £1,000 in savings interest annually, will be taxed at 22% instead of the current 20%. Similarly, higher-rate taxpayers will see their tax rate increase from 40% to 42%, and additional rate taxpayers will face a hike from 45% to 47%.
Rachel Reeves expressed that the reformation of the ISA system will maintain the £20,000 allowance, with £8,000 exclusively allocated for investment, while ensuring that over-65s retain the full cash allowance. Financial advice enhancements aim to guide savers towards better money management choices.
Sarah Coles, head of personal finance at Hargreaves Lansdown, highlighted concerns about the impact of the cash ISA allowance cut on savers, emphasizing the importance of utilizing cash ISAs to safeguard savings from taxation. The personal savings allowance will protect a portion of savings interest, with potential tax implications beyond the threshold.
Critics question the effectiveness of incentivizing investment behavior through these changes, while building societies warn of potential repercussions on mortgage availability due to reduced cash ISA deposits. Various types of ISAs cater to different saving needs, including cash ISAs, stocks and shares ISAs, Lifetime ISAs, and innovative finance ISAs, with Junior ISAs designed for children.
Currently, individuals can save up to £20,000 across their ISA accounts, with variations in limits for specific ISA types. As of 2023/24, data indicates that 9.9 million cash ISA accounts were active.
