Rachel Reeves has officially announced significant adjustments to cash ISAs, settling months of speculations. However, this isn’t the sole Budget revelation that might affect savers.
Starting from April 2027, the tax rate on savings interest will rise. Basic-rate taxpayers can receive up to £1,000 in savings interest annually before becoming liable to pay tax, known as the personal savings allowance.
Presently at 20%, the tax rate on savings interest exceeding this threshold will escalate to 22%. Tax is applicable on savings interest beyond this limit.
For instance, depositing funds in the current top-rate easy-access savings account at around 4.5% necessitates having over £22,000 stored for a year to potentially surpass the savings allowance.
Conversely, higher-rate taxpayers facing 40% tax on savings interest exceeding £500 annually will see this rate climb to 42% from April 2027. Additional rate taxpayers, currently taxed at 45% on all savings interest, will experience a surge to 47%.
ISA savings interest remains tax-free. The current annual allowance across all ISA accounts is £20,000.
The Chancellor’s recent announcement stipulates that individuals under 65 can only invest up to £12,000 yearly in a cash ISA starting April 2027. However, the overall £20,000 ISA limit will persist, allowing diversified investments like putting £12,000 in a cash ISA and £8,000 in a stocks and shares ISA.
The new cap won’t affect over-65s, who can continue saving up to £20,000 annually in a cash ISA.
Various types of ISAs cater to different needs, including cash ISAs, stocks and shares ISAs, Lifetime ISAs, and innovative finance ISAs, with children having Junior ISAs.
Sarah Coles from Hargreaves Lansdown emphasizes the importance of taking advantage of tax-efficient options like cash ISAs to shield savings from tax implications. While the personal savings allowance safeguards the initial £1,000 for basic rate taxpayers and £500 for higher rate taxpayers, any surplus will incur higher tax obligations.
Coles stresses the urgency to utilize cash ISAs before the impending changes take effect, emphasizing the enduring benefits of tax-protected savings within ISAs.
