Hundreds of thousands of savers across the UK are facing unexpected tax bills running into hundreds of pounds following a significant rule change announced by the government.
The Rule Change and Its Immediate Impact
In a move that has shaken personal finance, Chancellor Rachel Reeves has slashed the annual Cash ISA allowance from £20,000 to £12,000. This 40% reduction, set to take effect from 6 April 2027, means savers will no longer be able to shelter as much cash from the taxman. The change does not apply to the over-65s, who will retain the original £20,000 limit for Cash ISAs.
This decision has far-reaching consequences. Analysis from InvestEngine reveals that in the 2022/23 tax year, 7.1 million people paid into a Cash ISA. Crucially, more than a quarter of them saved above the new £12,000 limit.
Who Will Be Hit by the New Tax Charges?
The financial impact will be felt by a significant number of people. According to Andrew Prosser, Head of Investments at InvestEngine, almost 1.5 million basic-rate taxpayers and 462,000 higher-rate taxpayers deposited more than £12,000 into their Cash ISAs in the last financial year.
Mr Prosser explained the potential cost: "If they were to put that £8,000 - the difference between £20,000 and the new £12,000 limit - into a 4.5 per cent savings account, after five years, a basic-rate taxpayer will have lost around £288 in tax, while a higher-rate taxpayer could lose around £1,080, or £216 a year once their total savings interest exceeds the £500 allowance."
Opportunities Amidst the Change
While the cut is a blow for many, it also presents an opportunity. The Treasury claims the shake-up of tax-efficient accounts will "drive better returns for savers, and incentivise investment."
Andrew Prosser suggests a strategic shift: "By shifting part of their allowance - anything over £12,000 - into a Stocks & Shares ISA, savers can preserve the tax benefits of the full £20,000 limit while giving their money a chance to benefit from inflation-beating growth." He concludes that this could be a good moment for those who have not invested before to consider it as a way of reaching their financial goals.
However, the immediate concern remains for the millions who regularly use Cash ISAs for larger sums. "This cut to the allowance could push many into paying unnecessary tax on their savings interest," Mr Prosser warned.
