There’s a lot of changes that savers will need to understand further to the Budget as Rachel Reeves took a hammer blow to the cash ISA limit.
As of April 2027, it will be cut to £12,000 for anyone under the age of 65 – but that’s not the only thing savers have to worry about.
The amount of tax you’ll pay on your savings interest will also be hiked by two percentage points at the same time. Taxpayers will pay 22 per cent, 42 per cent and 47 per cent tax on their savings interest depending on if they’re on the basic, higher or additional rate.
But, it’s not all gloom. Savers at least have a chance to make the most of this valuable allowance for the next year and a half.
And, as the changes will not apply to the over-65s, they will still be able to use the full ISA allowance for their cash savings. This benefits the many older savers who prefer cash as they look to reduce the volatility of their investments and savings.
It’s also only the cash ISA allowance that has been cut. The overall allowance is still £20,000 but if you want to use all of it, you’ll need to deposit the remaining £8,000 into investments.
As savers have until April 2027 until the changes to the cash ISA allowance come into force, there is time for them to get their savings in order. Here’s how.
First, choose the best paying cash ISA rates if you are looking to deposit £20,000 both now and in the new tax year. Make sure you use it, or you’ll lose it!
Next, check the interest rates you are earning on existing cash ISAs – and transfer if you can earn more elsewhere – remember that there will be a hefty penalty if you try to switch fixed-term ISAs before they have matured, so do the maths to make sure it makes sense to switch before the term date.
For those who pay tax on savings interest, premium bonds could offer particularly competitive returns.
For example, a tax-free win of the new prize fund interest rate of 3.6 per cent is equivalent to a 4.5 per cent return for basic-rate taxpayers, 6 per cent for higher-rate taxpayers, and 6.55 per cent for additional-rate taxpayers in a taxable savings account.
No savings accounts currently offer anything close to these rates for higher and additional taxpayers.
Of course, the risk is that you win either less than this or even nothing at all, although, the latter is highly unlikely if you have a larger holding in premium bonds.
Basic-rate and higher-rate taxpayers still have a personal savings allowance (PSA) they can use – which means there they can earn a certain amount of interest before they have to pay any tax.
For basic-rate taxpayers the PSA is £1,000 a year, whilst for higher-rate taxpayers, it’s £500. Additional-rate taxpayers do not get any PSA.
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How will the cash ISA cut affect savers?
Currently, the best one-year fixed-rate savings account is paying 4.5 per cent – with Investec.
Meanwhile, the top one-year ISAs – with Investec and Tembo – are paying 4.3 per cent.
So, you get more interest for using the savings account rather than the ISA. But the advantage of the ISA, is none of the interest is taxed, while with the savings account it could be.
If you are a taxpayer and have already used up your full personal savings allowance – the amount you can earn from savings interest tax-free – then the changes announced in Wednesday’s Budget could hit you hard.
Look at the example below.
If you have £20,000 in the top ISA paying 4.3 per cent will earn you £860 in interest and that is entirely shielded from tax.
But under the new rules, you will only be able to pay in £12,000 a year, rather than £20,000. If you paid this amount into the ISA, you would earn £516 tax-free.
The extra £8,000 then has to go into a savings account, instead of an ISA. If it goes into the account paying 4.5 per cent, you would earn £360 in interest over a year. Then, the basic rate of tax would be deducted – 22 per cent – leaving you with £280.80.
Overall, this £280.80 from your savings account and £516 from the ISA comes to a total of £796.80.
This is £63 less than they would have had before the rules were changed.
Higher taxpayers – who must pay 42 per cent tax on savings interest – are even worse off.
For them, £12,000 into the top ISA pays interest of £516. An additional £8,000 into top savings account after the deduction of higher-rate tax will give them £208.80.
This is a total of £724.80 – over £135 less than if they had £20,000 in a top-paying ISA.
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