Rachel Reeves has officially announced significant changes to cash ISAs after much speculation. However, other Budget announcements could also affect savers. Starting in April 2027, the tax rate on savings interest will rise. Basic-rate taxpayers can earn up to £1,000 in savings interest annually before facing tax, known as the personal savings allowance. Currently set at 20%, the tax rate on savings interest above this threshold will increase to 22%, requiring individuals to pay tax on interest earned beyond the limit.
For instance, with the current top easy-access savings account rate at around 4.5%, savers would need over £22,000 saved for a year to potentially exceed their savings allowance. Conversely, higher-rate taxpayers, who face a 40% tax rate on savings interest exceeding £500 yearly, will see this rate increase to 42% in April 2027. Additionally, additional rate taxpayers, subject to a 45% tax rate on all savings interest, will experience a hike to 47%.
ISA savings interest remains tax-free. The current annual ISA savings limit stands at £20,000 across all ISA accounts. However, from April 2027, individuals under 65 will only be able to deposit up to £12,000 annually into a cash ISA. The overall ISA limit will remain at £20,000, allowing savers to allocate funds between different types of ISAs.
Those aged over 65 are unaffected by the new cash ISA cap and can continue saving up to £20,000 yearly as usual. The main ISA types include cash ISAs, stocks and shares ISAs, Lifetime ISAs, and innovative finance ISAs, with Junior ISAs designed for children.
Sarah Coles, head of personal finance at Hargreaves Lansdown, warned that more people may save outside tax-efficient environments, leading to exposure to the new tax rate. While the personal savings allowance safeguards the initial savings interest for taxpayers, any excess will incur higher taxes. Coles advised maximizing cash ISAs to protect savings from tax implications before the allowance changes take effect.