Rachel Reeves has officially announced a reduction in the cash ISA limit, specifically impacting younger savers. During her Autumn Budget speech, the Chancellor disclosed that starting from April 2027, the annual cash ISA limit will be decreased from £20,000 to £12,000.
Despite the cut, there will remain an overall ISA limit of £20,000. This adjustment allows savers the flexibility to allocate £12,000 to a cash ISA and £8,000 to a stocks and shares ISA, or invest the entire £20,000 in stocks and shares. Notably, individuals aged over 65 will not be subject to the new cap and can continue to save up to £20,000 annually in a cash ISA, which applies across all their ISA accounts.
An ISA functions as a tax-free savings account where 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 for various accounts will increase starting April 2027.
Basic-rate taxpayers currently pay 20% tax on savings interest exceeding £1,000 annually, which will rise to 22%. Higher-rate taxpayers, who pay 40% tax on savings interest exceeding £500 each year, will see their rate increase to 42%. Additionally, additional rate taxpayers, subject to 45% tax on all savings interest, will experience a hike to 47% from April 2027.
In response to these changes, Rachel Reeves stated, “From April 2027, I will reform our ISA system by maintaining the £20,000 allowance while dedicating £8,000 exclusively for investment, with over 65s retaining the full cash allowance. Thanks to our enhancements in financial advice and guidance, banks will be empowered to assist savers in making better financial decisions.”
Sarah Coles, head of personal finance at Hargreaves Lansdown, expressed concern over the tax implications for savers, emphasizing the importance of utilizing cash ISAs for tax protection. The adjustment to the cash ISA limit will be gradual, presenting an opportunity for individuals to maximize their allowance this year.
While the Chancellor aims to promote investment, critics question the impact on saving behaviors. Building societies have raised concerns that reducing the cash ISA limit could limit available mortgages, as they rely on deposits such as cash ISAs for lending purposes.
Various types of ISAs are available, including cash ISAs, stocks and shares ISAs, Lifetime ISAs, and innovative finance ISAs. Children also have access to Junior ISAs. Current regulations permit individuals to save up to £20,000 across their ISA accounts, though certain ISAs may have lower limits, like the £4,000 cap for a Lifetime ISA per tax year.
Recent data indicates that in 2023/24, the nation contributed to 9.9 million cash ISA accounts.