Rachel Reeves has officially announced significant adjustments to cash ISAs after prolonged speculation. However, the alterations to tax rates and savings interest will also affect savers. Starting from April 2027, the tax rate on savings interest will rise. Basic-rate taxpayers can earn up to £1,000 in savings interest annually tax-free, known as the personal savings allowance. Any interest earned above this threshold is taxed at 20%, increasing to 22% with the upcoming changes.
For instance, if one were to save in a top-rate easy-access savings account at 4.5%, they would need over £22,000 saved for a year to potentially exceed the savings allowance. Higher-rate taxpayers face lower thresholds, with tax rates increasing from 40% to 42% and 45% to 47% for additional rate taxpayers from April 2027.
ISA savings interest remains tax-free; currently, individuals can save up to £20,000 yearly across various ISA accounts. However, from April 2027, under-65 savers will be limited to saving £12,000 annually in a cash ISA. The overall ISA limit remains at £20,000, allowing for diversification between cash and stocks and shares ISAs.
Individuals over 65 remain unaffected by the new cap and can continue saving up to £20,000 yearly in a cash ISA. Various types of ISAs 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, warned of the risks of saving outside tax-efficient environments and facing higher tax rates. She emphasized the importance of utilizing cash ISAs for tax protection, especially with the upcoming changes. Taking advantage of the current allowance before the adjustments take effect is advisable.