Rachel Reeves has officially announced significant alterations to cash ISAs after much anticipation, with other Budget revelations also likely to impact savers.
Starting April 2027, the tax rate on savings interest will rise. Basic-rate taxpayers can earn up to £1,000 in savings interest annually before becoming liable for tax, known as the personal savings allowance. The current 20% tax rate on savings interest exceeding this threshold will increase to 22%.
For instance, to surpass the savings allowance with a top easy-access savings account rate of approximately 4.5%, one would need over £22,000 saved for a year.
Higher-rate taxpayers, subject to 40% tax on savings interest exceeding £500 annually, will face a 42% tax rate from April 2027. Additional rate taxpayers, currently paying 45% on all savings interest, will see this rate climb to 47%.
ISAs offer a tax-advantaged savings option, with no tax on interest earned. The current £20,000 yearly limit across all ISAs will remain, but under-65 savers will only be able to contribute £12,000 annually into a cash ISA starting April 2027. Over-65s will retain the ability to save up to £20,000 yearly in a cash ISA.
The cash ISA allowance change won’t be immediate, providing an opportunity to maximize the current allowance. Various types of ISAs exist, including cash ISAs, stocks and shares ISAs, Lifetime ISAs, and innovative finance ISAs, along with Junior ISAs for children.
Sarah Coles, Hargreaves Lansdown’s head of personal finance, warned of potential tax implications for savers and emphasized the importance of utilizing tax-efficient cash ISAs to shield savings from tax.