The Cash ISA allowance for those under age 65 will be cut from £20,000 to £12,000 starting April 2027. At the same time, tax on savings interest will increase from 20% to 22% for basic rate and from 40% to 42% for higher rate starting April 2027. The Personal Savings Allowance has been frozen at £1,000 for basic rate taxpayers instead of being increased with inflation.
Laura Suter, director of personal finance at AJ Bell, stated, 'The Budget also saw the personal savings allowance frozen for another year and the tax rates for savings interest increased – leading to a triple blow for cash savers. ' The cut to Cash ISA limits will not apply to people aged 65 and over. The state pension age is currently 66, rising to 67 from April.
The decision to cut the Cash ISA allowance for those under the age of 65 is going to lead to bigger tax bills for the nation. While the government is hoping the move is going to nudge more people into taking their first steps into investing, in reality many people will just leave their money in non-ISA accounts and so pay tax on their savings interest.
The change to Cash ISA rules could be worth over £9,000 to state pensioners over 10 years, according to financial experts, though the exact methodology used to calculate this benefit is unclear. The government has not specified what specific measures or alternatives it is implementing to encourage investment as intended by the ISA changes. Suter added, 'The decision to cut the Cash ISA allowance for those under the age of 65 is going to lead to bigger tax bills for the nation.
' AJ Bell research found that if the Cash ISA allowance was cut, most Cash ISA savers (51%) would simply stick the money in a taxable savings account. A quarter of people said they would buy Premium Bonds or another NS&I product if the Cash ISA allowance was cut. Suter explained, 'In our survey, a quarter of people said that if the Cash ISA allowance was cut they would buy Premium Bonds or another NS&I product.
The Budget also saw the personal savings allowance frozen for another year and the tax rates for savings interest increased – leading to a triple blow for cash savers. Quite simply, they will see more of their money taxed at higher rates.
The appeal of Premium Bonds has just increased dramatically for some people, as any winnings are tax-free. ' The ISA allowance for investments will remain at £20,000. Suter noted, 'While the ISA allowance will be slashed for cash, it will remain at the full £20,000 for investments.
' It is unknown how many people are expected to be affected by the cut to Cash ISA limits for those under 65. Suter advised, 'Savers looking down the barrel of a tax bill for their cash savings can look at other options to generate a return on their money before the April 2027 deadline hits. ' She further detailed, 'If you look at one year alone, and assume 4% interest on the cash, it doesn’t represent a huge sum of interest: just £320.
This means it’s covered by the personal savings allowance for both basic-rate and higher-rate taxpayers, assuming they have no other taxable savings, and lands additional-rate taxpayers with a £150 tax bill. ' The projected impact on government tax revenue from the increased savings tax rates and ISA changes has not been disclosed.