Rachel Reeves has officially announced a reduction in the cash ISA limit, specifically affecting younger savers. The Chancellor disclosed during her Autumn Budget that the annual cash ISA limit would decrease from £20,000 to £12,000 starting April 2027.
Although the cash ISA limit is being cut, the overall ISA limit remains at £20,000 annually. This adjustment allows individuals to 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. However, individuals aged over 65 are exempt from the new cap and can continue saving up to £20,000 each tax year in a cash ISA, as is currently permitted across all ISA accounts.
An ISA functions as a tax-free savings account where interest earned is exempt from taxation. Aside from the decrease in the cash ISA limit, it has been confirmed that the tax rate on savings interest for other 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 face a tax rate of 40% on savings interest over £500 per year, increasing to 42%, while additional rate taxpayers, who pay 45% tax on all savings interest, will see this rate climb to 47% from April 2027.
Rachel Reeves stated that from April 2027, reforms to the ISA system will maintain the full £20,000 allowance, designating £8,000 exclusively for investment while preserving the complete cash allowance for individuals over 65. These changes aim to enable banks to guide savers towards better financial choices.
Sarah Coles, head of personal finance at Hargreaves Lansdown, expressed concern about the impact of the cash ISA allowance cut on savers, emphasizing the importance of utilizing cash ISAs for tax protection. Critics have raised doubts about whether these changes will influence saving habits, and building societies warn that reducing the cash ISA limit could affect the availability of mortgages, as they rely on such deposits for lending purposes.
Various types of ISAs include cash ISAs, stocks and shares ISAs, Lifetime ISAs, and innovative finance ISAs, with children having Junior ISAs. While the current overall ISA limit is £20,000, certain ISAs, like Lifetime ISAs, have lower annual contribution limits, such as £4,000.
Recent data indicates that in 2023/24, 9.9 million cash ISA accounts were active.