Rachel Reeves has confirmed that the annual cash ISA limit will be reduced for younger savers starting from April 2027. The Chancellor announced the cut from £20,000 to £12,000 during her Autumn Budget speech.
Despite the decrease in the cash ISA limit, the overall ISA allowance will remain at £20,000. This means savers can allocate £12,000 to a cash ISA and the remaining £8,000 to a stocks and shares ISA, or invest the full £20,000 in stocks and shares. However, individuals over the age of 65 will not be subjected to the new limit and can continue to save up to £20,000 annually in a cash ISA.
An Individual Savings Account (ISA) allows for tax-free interest earnings. In addition to the reduction in the cash ISA limit, there will be an increase in the tax rate on savings interest for other accounts starting from April 2027.
Basic-rate taxpayers currently pay 20% tax on savings interest exceeding £1,000 annually, which will rise to 22%. Higher-rate taxpayers face a tax rate increase from 40% to 42% on savings interest over £500 per year, while additional rate taxpayers will see their tax rate rise from 45% to 47%.
Rachel Reeves stated that the reformation of the ISA system in April 2027 will maintain the full £20,000 allowance, with £8,000 earmarked specifically for investments, and individuals over 65 retaining the full cash allowance.
Sarah Coles, head of personal finance at Hargreaves Lansdown, expressed concerns about the impact of the cash ISA limit cut on savers, emphasizing the importance of utilizing tax-efficient cash ISAs to protect savings from taxes.
The decision to reduce the cash ISA limit has raised questions about its potential effects on saving habits and mortgage availability, as building societies rely on deposits like cash ISAs for lending purposes.
In addition to cash ISAs and stocks and shares ISAs, other types include Lifetime ISAs and innovative finance ISAs, with children having Junior ISAs. While the overall ISA limit is £20,000, certain types like Lifetime ISAs have lower annual limits, such as £4,000.
Recent data indicates that in 2023/24, the nation contributed to 9.9 million cash ISA accounts, highlighting the popularity of these savings vehicles.