Rachel Reeves has officially announced significant modifications to cash ISAs after prolonged speculations. However, this alteration is not the sole Budget declaration that might impact savers.
Beginning April 2027, the tax rate on savings interest will rise. Basic-rate taxpayers can earn up to £1,000 in savings interest annually before becoming liable for tax, known as the personal savings allowance. The tax rate on savings interest exceeding this threshold will increase from 20% to 22%.
For instance, depositing funds in the current top-rate easy-access savings account at around 4.5% would necessitate having over £22,000 saved for a year to approach the savings allowance limit. Conversely, higher-rate taxpayers, subject to a 40% tax when earning above £500 in savings interest annually, will see this rate climb to 42%. Additional rate taxpayers, currently paying 45% tax on all savings interest, will face a 47% tax rate.
ISA savings interest remains tax-free. Presently, individuals can save up to £20,000 annually across all existing ISA accounts. However, starting April 2027, individuals under 65 will be restricted to allocating £12,000 yearly to cash ISAs, maintaining the overall £20,000 ISA limit. Over-65s are exempt from this cap, retaining the ability to save up to £20,000 annually in a cash ISA.
Noteworthy ISA types include cash ISAs, stocks and shares ISAs, Lifetime ISAs, and innovative finance ISAs, with children having Junior ISAs. Sarah Coles, Hargreaves Lansdown’s head of personal finance, highlighted the importance of leveraging cash ISAs to shield savings from tax, emphasizing the necessity to utilize the current allowance effectively.