Chancellor Rachel Reeves has unveiled major changes to cash ISA rules, reducing the tax-free annual allowance from £20,000 to £12,000 for savers under 65, effective from April 2027. The move comes despite expectations that Reeves will be dismissed as Chancellor in the coming weeks following a change in party leadership.
New ISA Limits and Charges
Under the new rules, working-age savers will only be able to deposit up to £12,000 into cash ISAs each year. However, they can still invest the remaining £8,000 in stocks and shares ISAs, maintaining the overall £20,000 ISA allowance. Additionally, a 22% charge will be applied to interest earned on cash held within stocks and shares ISAs, aligning with the basic rate of tax on savings from the next tax year.
Pensioners aged 65 and over will remain unaffected, retaining the full £20,000 cash ISA allowance. This distinction between older and younger households may be viewed as unfair by some, but the government hopes the changes will encourage more investment in stocks and shares to boost the economy.
Impact on Savers
The reduction in the cash ISA limit will significantly impact how much savers can earn in tax-free interest over a year. Savers are advised to make the most of their current ISA allowance before the rate is slashed next year. Rob Morgan, chief investment analyst at Charles Stanley Direct, commented: "From April 2027, the annual cash ISA allowance will be cut from £20,000 to £12,000 for those under 65, while the overall ISA allowance will remain at £20,000. Older savers will retain the full £20,000 cash allowance. Alongside this, the Chancellor is reportedly planning to introduce a 22% charge on interest earned on cash held within stocks and shares ISAs – effectively aligning with the basic rate of tax on savings from next tax year."
Political Context
The new rules are set to come into force despite Reeves facing imminent removal as Chancellor. Likely incoming Prime Minister Andy Burnham is expected to replace her with his own appointee. The changes are part of a broader effort to shift savings behaviour towards investment, but they have sparked debate over fairness and the impact on working-age savers.
