Rachel Reeves has officially announced significant modifications to cash ISAs after much anticipation, with other Budget declarations also affecting 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. Above this threshold, the tax rate on savings interest will increase from 20% to 22%.
For individuals in the top-rate easy-access savings account, currently at around 4.5%, exceeding £22,000 in savings for a year would breach the savings allowance. Higher-rate taxpayers, paying 40% tax on savings interest over £500 annually, will see this rate increase to 42%. Additional rate taxpayers, who currently pay 45% tax on all savings interest, will experience a rise to 47%.
ISA savings interest remains tax-free. The current annual allowance across all ISA accounts is £20,000, though the Chancellor has announced changes. From April 2027, individuals under 65 can save a maximum of £12,000 annually in a cash ISA. The overall ISA limit will stay at £20,000, allowing flexibility to split savings between different types of ISAs.
People aged over 65 remain unaffected by the new cash ISA limit and can continue saving up to £20,000 yearly tax-free. 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, from Hargreaves Lansdown, warns of the potential impact of the new tax rate on savings held outside tax-efficient environments. While the personal savings allowance provides some protection, she advises leveraging cash ISAs for tax-free savings. The adjustment to the cash ISA allowance will not be immediate, allowing individuals to maximize their allowance this year.