Rachel Reeves has officially announced a reduction in the cash ISA limit, specifically affecting younger savers. The Chancellor disclosed in her Autumn Budget that the annual cash ISA limit will decrease from £20,000 to £12,000 starting April 2027.
Despite the cut, the overall ISA limit will remain at £20,000. This adjustment allows individuals to allocate £12,000 to a cash ISA and £8,000 to a stocks and shares ISA, or invest the entire £20,000 in stocks and shares. Notably, individuals over 65 will not be subject to the new limit and can still save up to £20,000 annually in a cash ISA, across any ISA accounts they hold.
An ISA is a tax-free savings account where interest earned remains untaxed. Additionally, alongside the reduction in the cash ISA rate, there will be an increase in the tax rate on savings interest for other accounts from April 2027.
Basic-rate taxpayers currently face a 20% tax on savings interest exceeding £1,000 annually, which will rise to 22%. Similarly, higher-rate taxpayers paying 40% tax on interest exceeding £500 a year will see it increase to 42%, while additional rate taxpayers, currently paying 45% tax, will experience a rise to 47% from April 2027.
Rachel Reeves stated, “From April 2027, I will revamp our ISA system by maintaining the full £20,000 allowance, earmarking £8,000 exclusively for investment, and preserving the complete cash allowance for over-65s.”
Sarah Coles, head of personal finance at Hargreaves Lansdown, expressed concern over the tax rise for savers due to the cash ISA allowance cut. She emphasized the importance of utilizing cash ISAs for tax protection, especially with the forthcoming changes.
Critics have questioned whether the Chancellor’s efforts to promote investment will alter saving behaviors. Building societies have raised concerns that reducing the cash ISA limit could impact the availability of mortgages, as they rely on deposits like cash ISAs for lending purposes.
The main types of ISAs include cash ISAs, stocks and shares ISAs, Lifetime ISAs, and innovative finance ISAs, with Junior ISAs available for children. While the current ISA limit stands at £20,000, certain ISAs have lower caps, such as the £4,000 limit for a Lifetime ISA per tax year.
In 2023/24, the nation collectively contributed to 9.9 million cash ISA accounts, reflecting the popularity of these savings vehicles.