Rachel Reeves has officially announced significant adjustments to cash ISAs after much anticipation. However, the alterations to the tax rate on savings interest from April 2027 will impact savers as well. Basic-rate taxpayers can earn up to £1,000 in savings interest annually before facing taxation, known as the personal savings allowance.
The current tax rate of 20% on savings interest exceeding the allowance will rise to 22%, requiring tax payment on interest above the threshold. Depositing funds in a top-rate easy-access savings account at 4.5% would necessitate saving over £22,000 for a year to potentially breach the savings allowance.
For higher-rate taxpayers, earning more than £500 in savings interest per year incurs a 40% tax, escalating to 42% from April 2027. Additional rate taxpayers facing a 45% tax on all savings interest will see this rate increase to 47%.
Savings interest within an ISA remains tax-free, with the current yearly limit set at £20,000 across various ISA accounts. Under the new changes effective from April 2027, individuals below 65 years old can only contribute £12,000 yearly to a cash ISA, maintaining the overall £20,000 ISA limit.
Individuals over 65 are unaffected by the revised cap and can continue saving up to £20,000 annually in a cash ISA. The primary types of ISAs include cash ISAs, stocks and shares ISAs, Lifetime ISAs, and innovative finance ISAs, with Junior ISAs designed for children.
Sarah Coles, head of personal finance at Hargreaves Lansdown, expressed concerns about more people saving outside tax-efficient environments and facing the new tax rate. While the personal savings allowance shields the initial £1,000 of savings interest for basic-rate taxpayers and £500 for higher-rate taxpayers, further interest will incur higher tax bills.
Coles emphasized the importance of utilizing cash ISAs for tax protection and advised taking advantage of the current allowance before potential changes take effect.