Rachel Reeves has officially announced significant adjustments to cash ISAs after extensive speculation. However, there are other Budget declarations that could impact savers. The tax rate on savings interest is set to increase from April 2027. Basic-rate taxpayers can earn up to £1,000 in savings interest annually before facing taxation, known as the personal savings allowance. The current tax rate of 20% on savings interest exceeding this threshold will rise to 22%, leading to tax obligations on interest above that limit.
For instance, depositing funds in a top-rate easy-access savings account at 4.5% would require over £22,000 saved for a year to potentially breach the savings allowance. Higher-rate taxpayers, subject to 40% tax when earning over £500 in savings interest annually, will see this rate increase to 42%. Additional rate taxpayers, currently facing 45% tax on all savings interest, will experience a hike to 47%.
Savings interest within an ISA remains tax-free, with the current annual limit set at £20,000 across all ISA accounts. Starting April 2027, individuals under 65 can only invest up to £12,000 yearly in a cash ISA. However, the overall £20,000 ISA limit remains in place, allowing diversification between cash and stocks and shares ISAs. Over-65s are unaffected by the new cap and can continue saving up to £20,000 annually in a cash ISA.
ISA variants include cash ISAs, stocks and shares ISAs, Lifetime ISAs, and innovative finance ISAs, with Junior ISAs tailored for children. Sarah Coles, head of personal finance at Hargreaves Lansdown, warns of potential tax exposure for those saving outside tax-efficient environments. While the personal savings allowance safeguards a portion of interest, utilizing cash ISAs becomes increasingly crucial to shield savings from taxation. The adjustment to the cash ISA allowance offers an opportunity for individuals to maximize their allowances before the change takes effect.