Rachel Reeves has officially announced a reduction in the cash ISA limit, specifically targeting younger savers. During her Autumn Budget speech, the Chancellor disclosed that the annual cash ISA limit would be decreased from £20,000 to £12,000 starting in April 2027.
Despite the cut, there will still be an overall ISA limit of £20,000, allowing individuals to allocate £12,000 to a cash ISA and £8,000 to a stocks and shares ISA. Alternatively, savers could invest the full £20,000 in stocks and shares. Notably, individuals over the age of 65 will remain unaffected by the new cap and can continue to save up to £20,000 annually in a cash ISA.
An ISA is a tax-free savings account where interest earned is exempt from taxation. In addition to the reduction in the cash ISA limit, it has been confirmed that the tax rate on savings interest for other accounts will increase from April 2027.
Basic-rate taxpayers currently pay 20% tax on savings interest exceeding £1,000 per year, which will rise to 22%. Higher-rate taxpayers face a 40% tax on savings interest over £500 annually, increasing to 42%. For additional rate taxpayers, the tax rate on all savings interest, currently at 45%, will escalate to 47% in April 2027.
Rachel Reeves emphasized that the ISA system will undergo reform in April 2027 to maintain the £20,000 allowance, with £8,000 designated exclusively for investment, while individuals over 65 retain the full cash allowance. The changes aim to provide improved financial advice and guidance to help savers make informed decisions.
Sarah Coles, head of personal finance at Hargreaves Lansdown, expressed concern over the impact of the cash ISA allowance cut, highlighting the importance of utilizing tax-efficient savings options. She noted that while the personal savings allowance offers some protection, savers may face higher tax bills beyond the threshold.
Critics have questioned whether the Chancellor’s efforts to promote investment will alter saving behaviors. Building societies have raised concerns that reducing the cash ISA limit could limit mortgage availability, as they rely on deposits such as cash ISAs for lending.
Various types of ISAs exist, including cash ISAs, stocks and shares ISAs, Lifetime ISAs, and innovative finance ISAs, with Junior ISAs tailored for children. Individuals can currently save up to £20,000 across all ISA accounts, though certain ISAs have lower limits, such as the £4,000 annual cap on Lifetime ISAs.
Recent data indicates that in 2023/24, the nation contributed to 9.9 million cash ISA accounts, reflecting the widespread use of these savings vehicles.