Rachel Reeves has officially announced significant adjustments to cash ISAs after widespread speculation. However, this isn’t the sole Budget declaration that could impact savers.
Starting in 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.
Presently, the tax rate is 20% on savings interest exceeding this threshold, but it will increase to 22%. Tax is applicable on savings interest surpassing this limit.
Consider depositing money in the current top-rate easy-access savings account, yielding around 4.5%. To risk breaching your savings allowance, you would need over £22,000 saved for a year.
For higher-rate taxpayers, the limit is lower, with a 40% tax imposed when earning more than £500 in savings interest annually. This rate will climb to 42% from April 2027. Additional rate taxpayers face a 45% tax on all savings interest, which will rise to 47%.
ISA savings interest remains tax-free. Currently, you can save up to £20,000 per tax year across all ISA accounts.
From April 2027, individuals under 65 can only deposit £12,000 annually into a cash ISA. However, the overall ISA limit of £20,000 remains, allowing a mix of cash and stocks and shares ISAs.
Those over 65 will retain the ability to save up to £20,000 annually in a cash ISA.
The primary types of ISAs include cash, stocks and shares, Lifetime, and innovative finance ISAs, along with Junior ISAs for children.
Sarah Coles, head of personal finance at Hargreaves Lansdown, expressed concerns about potential tax exposure due to the new rates. She emphasized the importance of utilizing cash ISAs for tax protection, as the change in cash ISA allowances will be gradual.
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