Rachel Reeves has officially announced a reduction in the cash ISA limit, specifically impacting younger savers. The Chancellor disclosed during her Autumn Budget that the annual cash ISA limit will be decreased from £20,000 to £12,000 starting in April 2027.
Despite the cut, the overall ISA limit will remain at £20,000. This adjustment allows savers to allocate £12,000 to a cash ISA and £8,000 to a stocks and shares ISA. Alternatively, individuals can invest the full £20,000 in stocks and shares. Notably, individuals aged over 65 will not be subject to the revised cap and can continue to contribute up to £20,000 annually into a cash ISA. The current allowance permits saving up to £20,000 across all ISA accounts per tax year.
An ISA functions as a tax-free savings account where interest earned remains untaxed. Alongside the reduction in the cash ISA limit, an increase in the tax rate on savings interest for other accounts is set to take effect from April 2027.
Basic-rate taxpayers, who exceed £1,000 in annual savings interest earnings, currently face a 20% tax rate, which will be raised to 22%. Higher-rate taxpayers are subject to a 40% tax on savings interest exceeding £500 annually, set to increase to 42%. Additional rate taxpayers, currently taxed at 45% on all savings interest, will see this rate rise to 47%.
Rachel Reeves stated, “Starting April 2027, I will revamp our ISA system, maintaining the £20,000 allowance while designating £8,000 explicitly for investment, with over 65s retaining the full cash allowance. Moreover, enhanced financial advice and guidance will empower banks to steer savers towards optimal investment choices.”
Expressing concern, Sarah Coles, head of personal finance at Hargreaves Lansdown, highlighted the significant tax hike for savers. She emphasized the importance of leveraging cash ISAs for tax-free savings protection, especially with the impending changes.
The Chancellor has faced calls to promote investment, although doubts linger over whether this policy shift will influence saving behaviors. Building societies caution that reducing the cash ISA limit could diminish the availability of mortgages, as these institutions rely on deposits like cash ISAs to fund lending activities.
Various ISA options exist, including cash ISAs, stocks and shares ISAs, Lifetime ISAs, and innovative finance ISAs, with children having access to Junior ISAs. While the current ISA limit is £20,000 across all accounts, certain ISAs have lower caps, such as a £4,000 limit for Lifetime ISAs annually.
Data from 2023/24 indicates that 9.9 million cash ISA accounts were active nationwide.
