Rachel Reeves has officially announced a reduction in the cash ISA limit specifically aimed at younger savers. This change, revealed during the Chancellor’s Autumn Budget, will see the annual cash ISA limit decrease from £20,000 to £12,000 starting in April 2027.
Despite the cut, the overall ISA limit will remain at £20,000. This means individuals can allocate £12,000 to a cash ISA and £8,000 to a stocks and shares ISA, or utilize the full allowance in stocks and shares. Notably, individuals over the age of 65 will not be impacted by the new cap and can continue to save up to £20,000 annually in a cash ISA. The current allowance across all ISA accounts stands at £20,000 per tax year.
An ISA functions as a tax-free savings account where any interest earned is exempt from taxation. Alongside the reduction in the cash ISA rate, it has been confirmed that the tax rate on savings interest for other accounts will increase effective April 2027.
For basic-rate taxpayers, the tax rate on savings interest exceeding £1,000 annually will rise from 20% to 22%. Higher-rate taxpayers will see their tax rate increase from 40% to 42% on savings interest surpassing £500 per year. Additionally, additional rate taxpayers will face a tax rate increase from 45% to 47% on all savings interest from April 2027.
Rachel Reeves announced the upcoming changes, stating, “From April 2027, I will overhaul our ISA system to maintain the full £20,000 allowance, designating £8,000 exclusively for investment, while ensuring over-65s retain the full cash allowance.”
Sarah Coles, head of personal finance at Hargreaves Lansdown, expressed concerns about the tax implications for savers due to the cash ISA limit cut. She highlighted the importance of utilizing cash ISAs to safeguard savings from taxation, especially with the impending changes.
The Chancellor has faced pressure to promote investment, although doubts persist about the potential impact on saving habits. Furthermore, building societies have raised concerns that reducing the cash ISA limit could limit available mortgages, as they rely on deposits like cash ISAs to support lending.
Various types of ISAs include cash ISAs, stocks and shares ISAs, Lifetime ISAs, and innovative finance ISAs, with children having access to Junior ISAs. While the current ISA allowance is £20,000, certain ISAs may have lower limits, such as the £4,000 annual limit for a Lifetime ISA.
The latest data indicates that in 2023/24, the nation contributed to 9.9 million cash ISA accounts, reflecting the popularity of these savings vehicles.