Rachel Reeves has officially announced a reduction in the cash ISA limit, specifically impacting younger savers. During her Autumn Budget speech, the Chancellor disclosed that starting from April 2027, the annual cash ISA limit will be decreased from £20,000 to £12,000.
Despite this adjustment, the overall ISA limit remains at £20,000. This means savers can allocate £12,000 to a cash ISA and the remaining £8,000 to a stocks and shares ISA. Alternatively, individuals can invest the full £20,000 in stocks and shares if they choose to do so.
Notably, individuals aged over 65 will not be subject to the revised cap and can continue to save up to £20,000 annually in a cash ISA. The tax-free nature of ISAs remains unchanged, with interest earned within these accounts exempt from taxation. In addition to the cash ISA limit reduction, there will also be an increase in the tax rate applied to savings interest from April 2027.
Basic-rate taxpayers, currently subject to a 20% tax on savings interest exceeding £1,000 per year, will see this rate rise to 22%. Higher-rate taxpayers, who pay 40% tax on savings interest over £500 annually, will experience an increase to 42%. For additional rate taxpayers, the tax rate on all savings interest will elevate from 45% to 47%.
Rachel Reeves stated that the new ISA system, effective from April 2027, will maintain the £20,000 allowance, with £8,000 designated exclusively for investments, while individuals over 65 retain the full cash allowance. In response to these changes, financial institutions will offer enhanced guidance to assist savers in making informed decisions regarding their finances.
Sarah Coles, head of personal finance at Hargreaves Lansdown, expressed concerns over the impact of the cash ISA limit cut on savers, highlighting the potential risk of individuals saving outside tax-efficient environments and facing higher tax rates. She emphasized the importance of leveraging cash ISAs for tax protection and advised individuals to utilize their current allowance before the changes take effect.
The Chancellor’s push to promote investment has sparked debates on whether these measures will indeed influence saving behaviors. Building societies have also raised concerns about the potential reduction in available mortgages due to the reliance on deposits from cash ISAs to support lending activities.
Common types of ISAs include cash ISAs, stocks and shares ISAs, Lifetime ISAs, and innovative finance ISAs, with children having Junior ISAs. Although the overall ISA limit is £20,000, certain types of ISAs have varying caps, such as the £4,000 limit for Lifetime ISAs per tax year.
Recent data indicates that in the 2023/24 fiscal year, the nation contributed to approximately 9.9 million cash ISA accounts.