Rachel Reeves has officially announced significant modifications to cash ISAs after much anticipation, but other Budget declarations could also impact savers. Beginning in April 2027, the tax rate on savings interest will rise. Basic-rate taxpayers will have a £1,000 personal savings allowance before incurring tax on savings interest, with a 20% tax rate on interest exceeding this limit, increasing to 22%. For instance, saving in a top-rate easy-access account at 4.5% would require over £22,000 saved for a year to potentially breach the allowance.
Higher-rate taxpayers face a lower threshold, paying 40% tax on savings interest exceeding £500 annually, which will increase to 42% by April 2027. Additional rate taxpayers currently pay 45% on all interest, set to rise to 47%. ISAs provide tax-free savings interest, with a current yearly allowance of £20,000 spread across various ISA accounts. However, starting in April 2027, individuals under 65 can only deposit £12,000 annually in cash ISAs, maintaining a total ISA limit of £20,000.
Over-65s remain unaffected by the new cap and can continue saving up to £20,000 yearly in cash ISAs. Common ISA types include cash ISAs, stocks and shares ISAs, Lifetime ISAs, and innovative finance ISAs, alongside Junior ISAs for children. With the upcoming changes, Sarah Coles, head of personal finance at Hargreaves Lansdown, emphasized the importance of utilizing tax-efficient cash ISAs to shield savings from the new tax rate. Basic-rate taxpayers will still benefit from the first £1,000 of savings interest tax-free, but beyond that, they will face increased tax liabilities.
Coles advised seizing the current allowance opportunity before the cash ISA adjustment takes effect.