Rachel Reeves has officially announced a reduction in the cash ISA limit, specifically affecting younger savers. During her Autumn Budget speech, the Chancellor disclosed that the annual cash ISA limit would 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 for a split where individuals can save £12,000 into a cash ISA and £8,000 into a stocks and shares ISA. Alternatively, savers can allocate the entire £20,000 to stocks and shares. Notably, individuals over the age of 65 will not be subject to the new cap and can continue saving up to £20,000 annually in a cash ISA.
An ISA functions as a tax-free savings account where interest earned is exempt from taxation. In addition to the cash ISA limit reduction, the tax rate on savings interest for other accounts is set to increase as of April 2027.
Basic-rate taxpayers currently pay 20% tax on savings interest exceeding £1,000 annually, which will rise to 22%. Higher-rate taxpayers face a tax rate increase from 40% to 42% when their savings interest surpasses £500 per year. Furthermore, additional rate taxpayers, who currently pay 45% tax on all savings interest, will experience an increase to 47% from April 2027.
Rachel Reeves stated, “From April 2027, I will reform our ISA system by preserving the full £20,000 allowance while earmarking £8,000 exclusively for investment, with over 65s maintaining the full cash allowance. Financial institutions will be empowered to guide savers towards better financial decisions.”
Sarah Coles, head of personal finance at Hargreaves Lansdown, expressed concern over the impact of the cash ISA limit reduction, emphasizing the importance of utilizing tax-efficient savings options. She highlighted the significance of cash ISAs for safeguarding savings from taxes, especially given the upcoming changes in tax rates.
While there is a push to encourage investment, concerns have been raised about potential shifts in saving behaviors. Building societies have voiced apprehensions that cutting the cash ISA limit could restrict mortgage availability, as they rely on deposits like 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 access to Junior ISAs. Individuals can currently save up to £20,000 across various ISA accounts, although specific ISAs may have lower contribution limits, such as the £4,000 cap for a Lifetime ISA per tax year.
Data from 2023/24 indicates that the nation contributed to 9.9 million cash ISA accounts.
