Rachel Reeves has officially announced significant adjustments to cash ISAs after months of anticipation. However, other Budget declarations could also influence savers. Starting from April 2027, the tax rate on savings interest will rise. Basic-rate taxpayers will have a £1,000 annual savings interest threshold before being subject to tax, known as the personal savings allowance. The current 20% tax on savings interest exceeding this limit will escalate to 22%.
To breach the savings allowance, individuals would need over £22,000 in a top rate easy-access savings account earning around 4.5% interest for a year. The threshold is lower for higher-rate taxpayers, who face a 40% tax when their savings interest surpasses £500 annually, increasing to 42% in April 2027. Additional rate taxpayers, paying 45% tax on all savings interest, will see this rate climb to 47%.
Savings interest in an ISA remains tax-free. Presently, up to £20,000 can be saved yearly across various ISA accounts. However, from April 2027, individuals under 65 can only place £12,000 annually in a cash ISA. The overall ISA limit remains at £20,000, allowing a combination of cash and stocks and shares ISAs.
The new cap won’t affect over-65s, who can continue depositing up to £20,000 annually in a cash ISA. Cash ISAs, stocks and shares ISAs, Lifetime ISAs, and innovative finance ISAs are the primary types available, with Junior ISAs tailored for children.
Sarah Coles, Hargreaves Lansdown’s head of personal finance, expressed concerns about potential tax exposure due to the increased rates. She highlighted the importance of utilizing tax-efficient cash ISAs to safeguard savings. While the change in cash ISA allowance won’t be immediate, maximizing the current allowance is advised.
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