Rachel Reeves has officially announced significant adjustments to cash ISAs after prolonged speculation. The alterations to tax rates on savings interest will take effect in April 2027. Basic-rate taxpayers can earn up to £1,000 in savings interest annually before being subject to tax, known as the personal savings allowance. The current 20% tax rate on savings interest exceeding this limit will increase to 22%.

For instance, depositing funds in a top-rate easy-access savings account at 4.5% would require savings exceeding £22,000 over a year to potentially breach the savings allowance. Higher-rate taxpayers, paying 40% tax on savings interest exceeding £500 annually, will see their tax rate rise to 42%. Additional rate taxpayers, currently paying 45% on all savings interest, will face a 47% tax rate.

ISA savings interest remains tax-free. The current annual ISA savings limit stands at £20,000. However, starting April 2027, individuals under 65 will be restricted to saving £12,000 annually in a cash ISA. The overall ISA limit of £20,000 will persist, allowing flexibility to divide savings between different types of ISAs.

Individuals over 65 are exempt from the new cap and can continue to save up to £20,000 yearly in a cash ISA. Various ISA options 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 leveraging cash ISAs for tax-efficient savings to mitigate exposure to higher tax rates. While the personal savings allowance protects a portion of savings interest, it is crucial to capitalize on cash ISAs to safeguard savings from tax. The adjustment to the cash ISA allowance will not be immediate, allowing individuals the opportunity to maximize their allowances this year.