Rachel Reeves has officially announced significant adjustments to cash ISAs after prolonged speculation. However, there are other Budget declarations that could have an impact on savers.
Starting from April 2027, the tax rate on savings interest will rise. Basic-rate taxpayers will have a £1,000 annual threshold for tax-free savings interest, known as the personal savings allowance. Any savings interest above this amount is currently taxed at 20%, but this rate will increase to 22%.
For instance, if you were to save in a top-rate easy-access savings account at 4.5%, you would need over £22,000 saved for a year to potentially exceed your savings allowance.
Higher-rate taxpayers, who pay 40% tax on savings interest exceeding £500 annually, will see this rate increase to 42% in April 2027. Additional rate taxpayers, who currently pay 45% tax on all savings interest, will face a 47% tax rate.
ISA savings interest remains tax-free. Currently, individuals can save up to £20,000 per tax year across all ISA accounts. The Chancellor has announced that from April 2027, individuals under 65 will be limited to saving £12,000 annually in cash ISAs.
The overall ISA limit will remain at £20,000, allowing flexibility to split savings between different ISA types. Over-65s are not subject to the new cash ISA cap and can continue saving up to £20,000 per tax year in cash ISAs.
Various ISA types include cash ISAs, stocks and shares ISAs, Lifetime ISAs, and innovative finance ISAs, with Junior ISAs tailored for children.
Sarah Coles, head of personal finance at Hargreaves Lansdown, warned of potential tax implications for savers due to the new tax rates. She emphasized the importance of utilizing cash ISAs to safeguard savings from taxation, highlighting the ongoing opportunity to maximize ISA allowances.