Rachel Reeves has officially announced significant adjustments to cash ISAs after much anticipation. However, there are other Budget declarations that could impact savers as well.
Starting April 2027, the tax rate on savings interest will rise. Basic-rate taxpayers can earn up to £1,000 in savings interest annually before being subject to tax, known as the personal savings allowance. The current tax rate of 20% on savings interest exceeding this threshold will increase to 22%.
To potentially exceed the savings allowance with a top-rate easy-access savings account at 4.5%, you would need over £22,000 saved for a year. For higher-rate taxpayers, the threshold is lower, with a 40% tax rate applying when savings interest exceeds £500 annually, increasing to 42% from April 2027. Additional rate taxpayers, subject to 45% tax on all savings interest, will see this rate rise to 47%.
Tax on savings interest within an ISA is exempt. Presently, individuals can save up to £20,000 yearly across various ISA accounts. However, from April 2027, individuals under 65 will have a reduced cash ISA limit of £12,000 annually. Nonetheless, the overall ISA limit will remain at £20,000, allowing a split between cash and stocks and shares ISAs.
Those over 65 will not be impacted by the new cap and can continue saving up to £20,000 annually into a cash ISA. Various types of ISAs exist, including cash, stocks and shares, Lifetime, and innovative finance ISAs, with Junior ISAs tailored for children.
Sarah Coles, Hargreaves Lansdown’s head of personal finance, warned of the potential for more people to save outside tax-efficient environments, exposing them to the new tax rate. While the personal savings allowance offers initial protection, it’s crucial to utilize cash ISAs for tax-free savings. The transition in the cash ISA allowance will not be immediate, providing an opportunity to maximize this year’s allowance.