Rachel Reeves has officially announced a reduction in the cash ISA limit, specifically affecting younger savers. During her Autumn Budget speech, the Chancellor disclosed that the yearly cash ISA limit will be decreased from £20,000 to £12,000 starting April 2027.
Despite the reduction, the overall ISA limit remains at £20,000. This means individuals can allocate £12,000 to a cash ISA and the remaining £8,000 to a stocks and shares ISA, or opt to invest the entire allowance in stocks and shares. Notably, individuals over the age of 65 are exempt from the new limit and can continue saving up to £20,000 annually in a cash ISA.
An ISA functions as a tax-free savings account where interest earnings are exempt from taxation. Apart from the cash ISA adjustment, there will be an increase in the tax rate on savings interest for other accounts commencing April 2027.
Under the new tax regime, basic-rate taxpayers will face a rise from 20% to 22% tax on savings interest exceeding £1,000 per year, while higher-rate taxpayers will see their tax rate increase from 40% to 42% on savings interest exceeding £500 annually. Additional rate taxpayers will experience an increase from 45% to 47% on all savings interest from April 2027 onwards.
Rachel Reeves stated during the announcement that the ISA system would undergo reform in April 2027, maintaining the full £20,000 allowance while earmarking £8,000 exclusively for investment, with individuals over 65 retaining the full cash allowance. Additionally, changes in financial advice and guidance will enable banks to assist savers in making better financial choices.
Sarah Coles, head of personal finance at Hargreaves Lansdown, expressed concerns about the tax implications for savers due to the cash ISA limit cut, emphasizing the importance of utilizing tax-efficient vehicles such as cash ISAs. Moreover, she highlighted the necessity of taking advantage of the current allowance before the adjustment takes effect.
Critics have questioned the effectiveness of the Chancellor’s initiative to promote investment, while building societies have raised concerns about potential impacts on mortgage availability resulting from the reduced cash ISA limit, which often contributes to funding their lending activities.
Notable ISA types include cash ISAs, stocks and shares ISAs, Lifetime ISAs, and innovative finance ISAs, with children having access to Junior ISAs. Although the current overall ISA limit is £20,000, specific ISA types may have lower annual contribution limits, like the £4,000 yearly limit for a Lifetime ISA.
Recent data indicates that in the 2023/24 fiscal year, 9.9 million cash ISA accounts were active.