Rachel Reeves has officially announced a reduction in the cash ISA limit, but this change will only impact younger savers. During her Autumn Budget speech, the Chancellor disclosed that the annual cash ISA limit will decrease from £20,000 to £12,000 starting in April 2027.
Despite the cut, there will still be a total ISA limit of £20,000. This means individuals can save up to £12,000 in a cash ISA and £8,000 in a stocks and shares ISA, or allocate the full allowance to stocks and shares. However, individuals over the age of 65 will not be subject to the new limit and can continue saving up to £20,000 annually in a cash ISA. Currently, savers can deposit up to £20,000 each tax year across all their ISA accounts.
An ISA is a tax-free savings account where any interest earned is exempt from taxation. Alongside the reduction in the cash ISA limit, it has been confirmed that the tax rate on savings interest from other accounts will increase from April 2027.
Basic-rate taxpayers, who earn more than £1,000 annually in savings interest, currently pay 20% tax. This rate will rise to 22%. Higher-rate taxpayers, earning over £500 in savings interest per year, currently pay 40% tax, which will increase to 42%. Additionally, additional rate taxpayers, who pay 45% tax on all savings interest, will see this rate climb to 47% from April 2027.
Rachel Reeves stated, “Starting April 2027, I will revamp our ISA system to maintain the full £20,000 allowance, with £8,000 designated exclusively for investment, while individuals aged 65 and above will retain the full cash allowance. Moreover, with the adjustments in financial advice and guidance, banks will be able to steer savers towards better investment choices.”
Sarah Coles, head of personal finance at Hargreaves Lansdown, expressed concern over the impact of the cash ISA limit cut, emphasizing the importance of utilizing cash ISAs to shield savings from taxes. The changes are expected to prompt individuals to consider different saving strategies.
Building societies have raised concerns that reducing the cash ISA limit could limit the availability of mortgages, as they rely on deposits such as cash ISAs to fund lending. The main types of ISAs include cash ISAs, stocks and shares ISAs, Lifetime ISAs, and innovative finance ISAs, with children having Junior ISAs.
As of now, individuals can save up to £20,000 across their ISA accounts, but certain ISAs have lower limits, like the £4,000 cap on Lifetime ISAs per tax year. Recent data reveals that in 2023/24, 9.9 million cash ISA accounts were used by the nation for savings.