Rachel Reeves has officially announced significant adjustments to cash ISAs after prolonged speculation. However, the alterations to tax rates on savings interest set to take effect in April 2027 could also impact savers.
Starting in April 2027, the tax rate on savings interest will rise. Basic-rate taxpayers will have a personal savings allowance of £1,000 annually before incurring tax. Any savings interest exceeding this amount will be taxed at a rate of 22%, up from the current 20%.
For instance, if funds are saved in a top-rate easy-access savings account at 4.5%, savings exceeding £22,000 for a year could breach the personal savings allowance threshold. Higher-rate taxpayers, who pay 40% tax on earnings above £500 in savings interest annually, will see their tax rate increase to 42% in April 2027. Additional rate taxpayers, subject to 45% tax on all savings interest, will face a 47% tax rate.
ISA savings interest remains tax-free. Currently, individuals can save up to £20,000 per tax year across various ISA accounts. However, from April 2027, individuals under 65 will be limited to saving £12,000 annually in cash ISAs, keeping the overall ISA limit at £20,000. Over-65s will maintain the ability to save up to £20,000 per tax year in a cash ISA.
The various ISA types include cash ISAs, stocks and shares ISAs, Lifetime ISAs, and innovative finance ISAs, with Junior ISAs available for children. Sarah Coles, head of personal finance at Hargreaves Lansdown, highlighted the importance of utilizing tax-efficient cash ISAs to shield savings from new tax rates. She emphasized the need to capitalize on the current cash ISA allowance before changes take effect.