Rachel Reeves has officially announced a reduction in the cash ISA limit specifically for younger savers. The Chancellor disclosed during the Autumn Budget that the annual cash ISA limit would be decreased from £20,000 to £12,000 starting in April 2027.
Despite the cut, the overall ISA limit remains at £20,000, allowing savers to split their allowance between cash ISAs and stocks and shares ISAs. Individuals aged over 65 are exempt from the new limit and can continue saving up to £20,000 annually in a cash ISA. Additionally, interest earned within an ISA is tax-free.
Furthermore, the standard rate of tax on savings interest for non-ISA accounts will see an increase from April 2027. Basic-rate taxpayers currently pay 20% tax on savings interest exceeding £1,000 annually, which will rise to 22%. Higher-rate and additional rate taxpayers will also experience an increase in tax on savings interest.
Rachel Reeves stated that the ISA system will undergo reform in April 2027, maintaining the £20,000 allowance with a portion designated for investment, while individuals over 65 retain the full cash allowance. Financial institutions will be empowered to offer better guidance to savers regarding investment choices.
The rise in taxes on savings has drawn criticism from experts, highlighting the importance of utilizing tax-efficient savings options like cash ISAs. The reduction in the cash ISA allowance could potentially lead to more savers seeking non-tax-efficient savings methods.
Critics question whether these changes will effectively promote investment habits. Building societies have expressed concerns that cutting the cash ISA limit might impact the availability of mortgages, as they heavily rely on deposits such as cash ISAs for funding.
Various types of ISAs are available, including cash ISAs, stocks and shares ISAs, Lifetime ISAs, and innovative finance ISAs, with Junior ISAs tailored for children. Individuals can currently save up to £20,000 across their ISA accounts, subject to specific limits for certain types of ISAs, such as the Lifetime ISA.
Recent data indicates that in 2023/24, the nation contributed to 9.9 million cash ISA accounts, emphasizing the popularity and significance of these savings vehicles.