Rachel Reeves has officially announced significant modifications to cash ISAs after much anticipation. However, the alterations in the Budget could also impact savers beyond this. Starting in April 2027, the tax rate on savings interest is set to increase. 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 tax rate of 20% on savings interest exceeding this threshold will be raised to 22%. Any savings interest earned above this limit will be taxable. For instance, saving in a top-rate easy-access savings account at around 4.5% would require over £22,000 saved for a year to potentially breach the savings allowance.
Higher-rate taxpayers face a lower threshold, with a 40% tax applied when savings interest exceeds £500 annually. This will escalate to 42% from April 2027. Additional rate taxpayers, who currently pay 45% tax on all savings interest, will see this rate climb to 47%.
Notably, savings interest within an ISA is tax-free. Presently, individuals can save up to £20,000 yearly across various ISA accounts. However, from April 2027, individuals under 65 will only be allowed to deposit £12,000 annually into a cash ISA, maintaining an overall £20,000 ISA limit.
Over-65s remain unaffected by this cap, retaining the ability to save up to £20,000 yearly in a cash ISA. Various ISAs include cash ISAs, stocks and shares ISAs, Lifetime ISAs, and innovative finance ISAs, with Junior ISAs tailored for children.
Sarah Coles, head of personal finance at Hargreaves Lansdown, expressed concerns about more people saving outside tax-efficient environments and facing the new tax rate. While the personal savings allowance safeguards the initial £1,000 of savings interest for basic rate taxpayers and £500 for higher rate taxpayers, exceeding this will result in increased tax liabilities.
Coles emphasized the importance of utilizing cash ISAs to shield savings from tax implications, highlighting that the adjustment to the cash ISA allowance will not be immediate, providing an opportunity to maximize the allowance this year.