Rachel Reeves has officially announced a reduction in the cash ISA limit, specifically impacting younger savers. During her Autumn Budget speech, the Chancellor disclosed that starting April 2027, the annual cash ISA limit will be decreased from £20,000 to £12,000.
Despite the cut, the overall ISA limit will remain at £20,000. This adjustment allows individuals to allocate £12,000 to a cash ISA and £8,000 to a stocks and shares ISA. Those over the age of 65 are exempt from the new limit and can continue to save up to £20,000 annually in a cash ISA. Presently, individuals can save up to £20,000 across all their ISA accounts each tax year.
A cash ISA is a savings account where interest earnings are tax-free. Alongside the reduction in the cash ISA limit, it has been confirmed that the tax rate on savings interest for other accounts will increase from April 2027.
Basic-rate taxpayers currently pay 20% tax on savings interest exceeding £1,000 annually. This rate will rise to 22%, with tax applying to interest exceeding the threshold. Higher-rate taxpayers face a 40% tax on savings interest surpassing £500 a year, which will elevate to 42%. Additionally, additional rate taxpayers will see their tax rate on all savings interest increase from 45% to 47% starting April 2027.
The changes proposed by Rachel Reeves aim to revamp the ISA system by maintaining the £20,000 allowance and dedicating £8,000 exclusively for investment, while allowing over-65s to retain the full cash allowance. Financial institutions will also provide enhanced guidance to assist savers in making prudent decisions regarding their finances.
Sarah Coles, head of personal finance at Hargreaves Lansdown, expressed concerns about the tax implications for savers due to the cash ISA limit reduction. She emphasized the importance of utilizing cash ISAs for tax protection, especially with the impending tax rate increases.
Critics have questioned the effectiveness of these changes in promoting investment behaviors, while building societies have raised concerns about potential impacts on mortgage availability resulting from the reduced cash ISA limit. Common types of ISAs include cash ISAs, stocks and shares ISAs, Lifetime ISAs, and innovative finance ISAs, with children having access to Junior ISAs.
As of now, individuals can save up to £20,000 across their ISA accounts, although certain ISAs may have lower limits. For instance, the maximum contribution for a Lifetime ISA is £4,000 per tax year. Recent statistics indicate that in 2023/24, the nation collectively deposited funds into 9.9 million cash ISA accounts.