Rachel Reeves has officially announced significant adjustments to cash ISAs after prolonged speculation. However, other Budget declarations could also affect savers. Starting in April 2027, the tax rate on savings interest will rise. Basic-rate taxpayers can receive £1,000 in savings interest annually before facing taxation, known as the personal savings allowance. The tax rate on savings interest exceeding this threshold will increase from 20% to 22%.
For instance, depositing funds in the current top-rate easy-access savings account, yielding around 4.5%, would require over £22,000 saved for a year to potentially breach the savings allowance. Conversely, higher-rate taxpayers, subjected to 40% tax when earning over £500 in savings interest annually, will see this rate rise to 42%. Additional rate taxpayers, taxed at 45% on all savings interest, will experience an increase to 47%.
ISA savings interest remains tax-free. Presently, individuals can save up to £20,000 yearly across various ISA accounts. As of April 2027, individuals under 65 can only invest £12,000 annually in a cash ISA. Nonetheless, the overall ISA limit remains at £20,000, allowing a split between cash and stocks and shares ISAs.
Individuals over 65 are unaffected by the new cap and can continue saving up to £20,000 annually in a cash ISA. Popular ISA types include cash ISAs, stocks and shares ISAs, Lifetime ISAs, and innovative finance ISAs, with children having Junior ISAs.
Sarah Coles, Head of Personal Finance at Hargreaves Lansdown, emphasized the importance of utilizing tax-efficient cash ISAs to safeguard savings from taxation. She highlighted the upcoming tax changes and the need for prudent financial planning to navigate the evolving landscape effectively.
