Rachel Reeves has officially announced a reduction in the cash ISA limit, specifically impacting younger savers. The cut was unveiled by the Chancellor during her Autumn Budget, revealing that the annual cash ISA limit would decrease from £20,000 to £12,000 starting April 2027.
Despite the reduction, the overall ISA limit remains at £20,000. This adjustment allows individuals to allocate £12,000 to a cash ISA and £8,000 to a stocks and shares ISA, or the full £20,000 into stocks and shares alone. Notably, individuals over the age of 65 are exempt from the new cap and can continue to save up to £20,000 annually in a cash ISA, with the ability to spread the allowance across different ISA accounts.
An ISA functions as a tax-free savings account, ensuring that any accrued interest remains untaxed. Alongside the decrease in the cash ISA limit, it has been confirmed that the tax rate on savings interest for other accounts will rise effective April 2027.
For basic-rate taxpayers, the tax rate on savings interest exceeding £1,000 annually will increase from 20% to 22%. Similarly, higher-rate taxpayers will see their tax rate on savings interest above £500 a year rise from 40% to 42%, while additional rate taxpayers will face an increase from 45% to 47% on all savings interest.
In her announcement, Rachel Reeves stated, “Starting April 2027, I will revamp our ISA system, maintaining the full £20,000 allowance with £8,000 exclusively designated for investment, while preserving the full cash allowance for over 65s.” She emphasized that improved financial advice and guidance would enable banks to steer savers towards more advantageous choices for their finances.
Sarah Coles, head of personal finance at Hargreaves Lansdown, expressed concern over the substantial tax hike for savers, highlighting the potential consequences of the cash ISA limit cut on individuals’ tax liabilities. She underscored the importance of leveraging cash ISAs to shield savings from tax and suggested that individuals utilize their current allowance before the change takes effect.
Critics have raised doubts about whether the measures to incentivize investment will effectively alter saving behaviors. Building societies have also warned that reducing the cash ISA limit might limit the availability of mortgages, as these institutions rely on deposits like cash ISAs for lending purposes.
Various types of ISAs are available, including cash ISAs, stocks and shares ISAs, Lifetime ISAs, innovative finance ISAs, and Junior ISAs for children. While the overall ISA limit stands at £20,000, certain ISAs impose lower caps, such as the £4,000 annual limit for a Lifetime ISA.
Recent statistics indicate that in 2023/24, the country collectively contributed to 9.9 million cash ISA accounts.