Rachel Reeves has officially announced a reduction in the cash ISA limit, specifically affecting younger savers. During her Autumn Budget speech, the Chancellor disclosed that the yearly cash ISA limit will decrease from £20,000 to £12,000 starting April 2027. Despite this cut, the overall ISA limit remains at £20,000, allowing individuals to allocate £12,000 to a cash ISA and £8,000 to a stocks and shares ISA, or utilize the full allowance in stocks and shares.
Notably, individuals aged 65 and above are exempt from the new cap and can continue saving up to £20,000 annually in a cash ISA. Furthermore, tax-free interest is a key feature of ISAs, with the announcement also indicating an upcoming increase in the tax rate on savings interest from April 2027.
Basic-rate taxpayers currently pay 20% tax on savings interest exceeding £1,000 annually, which will rise to 22%. Similarly, higher-rate taxpayers face a tax increase from 40% to 42% when savings interest surpasses £500 per year. Additional rate taxpayers, subject to a 45% tax rate, will see this elevate to 47% come April 2027.
Rachel Reeves outlined the upcoming reforms to the ISA system, preserving the full £20,000 allowance while earmarking £8,000 exclusively for investment, with individuals over 65 retaining the full cash allowance. Notably, the changes in financial advice and guidance are aimed at assisting savers in making better financial decisions.
Sarah Coles, head of personal finance at Hargreaves Lansdown, expressed concern over the impact of the cash ISA allowance cut on savers, emphasizing the importance of utilizing tax-efficient savings options like cash ISAs to mitigate the effects of the tax rate hike.
Critics have questioned the effectiveness of these measures in altering saving behaviors, while building societies have raised concerns about potential limitations on available mortgages due to reduced cash ISA deposits. Various types of ISAs cater to different savings needs, including cash ISAs, stocks and shares ISAs, Lifetime ISAs, innovative finance ISAs, and Junior ISAs for children.
It is essential to note that individuals can currently save up to £20,000 across their ISA accounts, with some types having specific lower limits, such as the £4,000 yearly limit for a Lifetime ISA. Recent data indicates that in 2023/24, the nation collectively contributed to 9.9 million cash ISA accounts.