Rachel Reeves has officially announced significant adjustments to cash ISAs after much anticipation. However, this isn’t the sole Budget declaration that could impact savers. Starting in April 2027, the tax rate on savings interest is set to increase. Basic-rate taxpayers can earn up to £1,000 in savings interest annually before becoming liable to pay tax, known as the personal savings allowance.

Currently, the tax rate is 20% on savings interest exceeding this threshold, but it will rise to 22%. Any savings interest earned above this limit is subject to taxation. For instance, depositing money into the current top-rate easy-access savings account, yielding about 4.5%, would require holding over £22,000 for a year to risk surpassing the savings allowance.

Conversely, higher-rate taxpayers face a lower limit, with a 40% tax rate applying once they earn over £500 in savings interest annually, which will increase to 42% from April 2027. Additionally, additional rate taxpayers are taxed at 45% on all savings interest, slated to rise to 47%.

ISA savings interest remains tax-free. Presently, individuals can save up to £20,000 per tax year across various ISA accounts. Nonetheless, from April 2027, savers under 65 will be restricted to depositing £12,000 annually into a cash ISA. The overall ISA limit will remain at £20,000, allowing flexibility like saving £12,000 in a cash ISA and £8,000 in a stocks and shares ISA.

Those over 65 will not be affected by the new cap and can continue saving up to £20,000 annually into a cash ISA. The primary types of ISAs include cash ISAs, stocks and shares ISAs, Lifetime ISAs, and innovative finance ISAs, with children having Junior ISAs.

Sarah Coles, head of personal finance at Hargreaves Lansdown, warned of potential tax implications for savers outside tax-efficient environments due to the new tax rate. While the personal savings allowance offers protection, exceeding the limit will result in increased tax liabilities. Coles emphasized the importance of utilizing cash ISAs to shield savings from taxation, noting that the change in the cash ISA allowance will not be immediate, allowing savers to maximize their allowance this year.