Rachel Reeves has officially confirmed a reduction in the cash ISA limit, specifically affecting younger savers. The Chancellor announced during her Autumn Budget that starting April 2027, the annual cash ISA limit will be decreased from £20,000 to £12,000.
Despite the cut, the overall ISA limit will remain at £20,000, enabling savers to allocate £12,000 to a cash ISA and the remaining £8,000 to a stocks and shares ISA. Individuals can also choose to invest the entire £20,000 in stocks and shares. However, individuals aged over 65 will not be impacted by this change and can continue to save up to £20,000 annually in a cash ISA.
An ISA functions as a tax-free savings account, where any interest earned remains untaxed. In addition to the cash ISA reduction, it has been disclosed that the tax rate on savings interest for other account types will increase as of April 2027.
Basic-rate taxpayers, who currently pay 20% tax on savings interest exceeding £1,000 annually, will see this rate rise to 22%. Higher-rate taxpayers, paying 40% tax on interest above £500 yearly, will face an increase to 42%. For additional rate taxpayers subject to 45% tax, the rate will elevate to 47% effective from April 2027.
Rachel Reeves stated, “From April 2027, I will reform our ISA system to maintain the full £20,000 allowance, designating £8,000 for investment purposes while preserving the full cash allowance for individuals over 65.”
Sarah Coles, head of personal finance at Hargreaves Lansdown, expressed concern over the tax hike for savers, emphasizing the importance of utilizing cash ISAs for tax protection. The shift in the cash ISA allowance is not immediate, offering an opportunity for individuals to maximize their allowance this year.
Pressure on the Chancellor to promote investment has led to debates on whether altering ISA limits will influence saving habits. Building societies argue that reducing the cash ISA limit could impact the availability of mortgages, as they rely on deposits such as cash ISAs for lending.
Various types of ISAs include cash ISAs, stocks and shares ISAs, Lifetime ISAs, and innovative finance ISAs, with children having Junior ISAs. While the overall ISA limit is £20,000, specific ISA types may have lower caps, like the £4,000 limit for a Lifetime ISA annually.
Recent data reveals that in 2023/24, 9.9 million cash ISA accounts were active.