Rachel Reeves has officially announced a reduction in the cash ISA limit, specifically affecting younger savers. The Chancellor disclosed during her Autumn Budget that the annual cash ISA limit will decrease from £20,000 to £12,000 starting in April 2027.
Although the cash ISA limit is being cut, there will still be an overall £20,000 ISA limit. This means that individuals can allocate £12,000 to a cash ISA and £8,000 to a stocks and shares ISA. Alternatively, the full £20,000 allowance can be invested in stocks and shares.
However, individuals aged over 65 will not be impacted by this new limit and can continue to save up to £20,000 annually in a cash ISA. Currently, savers can deposit up to £20,000 each tax year across all their ISA accounts.
An ISA is a tax-free savings account where any interest earned remains untaxed. 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.
For basic-rate taxpayers, the tax rate on savings interest exceeding £1,000 per year will rise from 20% to 22%. Higher-rate taxpayers will see their tax rate on savings interest over £500 per year increase from 40% to 42%, while additional rate taxpayers will face a hike from 45% to 47% on all savings interest.
Rachel Reeves stated that starting April 2027, reforms to the ISA system will maintain the full £20,000 allowance, with £8,000 designated exclusively for investment, while individuals over 65 retain the complete cash allowance. Additionally, enhancements to financial advice and guidance will enable banks to steer savers towards better financial choices.
Sarah Coles, head of personal finance at Hargreaves Lansdown, expressed concerns over the impact of the cash ISA allowance cut, highlighting potential risks for savers who may opt to save outside tax-efficient environments, subjecting them to the new tax rate. She emphasized the importance of utilizing cash ISAs to protect savings from taxation.
Critics have questioned the effectiveness of the Chancellor’s efforts to encourage investment and change saving habits. Building societies have warned that reducing the cash ISA limit could restrict the availability of mortgages, as they rely on deposits such as cash ISAs to fund lending.
The main types of ISAs include cash ISAs, stocks and shares ISAs, Lifetime ISAs, and innovative finance ISAs, with children having Junior ISAs. While the overall ISA limit is £20,000, specific types of ISAs may have lower contribution limits, like the £4,000 annual limit for Lifetime ISAs.
Recent data indicates that in the 2023/24 fiscal year, 9.9 million cash ISA accounts were utilized by savers.