Rachel Reeves has officially announced significant changes to cash ISAs after much anticipation. However, other Budget declarations could also 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 facing taxation, known as the personal savings allowance. Currently set at 20%, the tax rate on savings interest exceeding this threshold will increase to 22%.
For instance, to risk surpassing the savings allowance with the current top easy-access savings account rate of approximately 4.5%, one would need over £22,000 saved for a year. Higher-rate taxpayers, who pay 40% tax on savings interest exceeding £500 yearly, will see their rate climb to 42% from April 2027. Additional rate taxpayers, taxed at 45% on all savings interest, will face a 47% rate.
Notably, no tax is levied on savings interest within an ISA. Currently, individuals can save up to £20,000 per tax year across various ISA accounts. However, from April 2027, individuals under 65 will be limited to saving £12,000 annually in a cash ISA. The overall ISA limit will remain at £20,000, allowing for diversified saving strategies like allocating funds to both cash and stocks and shares ISAs.
Those aged over 65 will remain unaffected by the new cap and can continue saving up to £20,000 yearly in a cash ISA. Common ISA types include cash ISAs, stocks and shares ISAs, Lifetime ISAs, and innovative finance ISAs, with Junior ISAs catering to children.
Sarah Coles, head of personal finance at Hargreaves Lansdown, cautioned that more individuals might save outside tax-efficient environments, exposing them to 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 these limits will lead to higher tax bills. Coles emphasized the importance of utilizing cash ISAs to shield savings from tax, noting that the cash ISA allowance change will not occur immediately, presenting an opportunity to maximize the current allowance.