Rachel Reeves has officially announced significant adjustments to cash ISAs after prolonged speculation. The alterations in tax rates on savings interest are set to take effect from April 2027. Basic-rate taxpayers will have a £1,000 personal savings allowance per year before incurring tax on their savings interest. Any interest earned beyond this threshold will be subject to a 22% tax rate, up from the current 20%.

For instance, individuals saving in a top-rate easy-access savings account at 4.5% would need over £22,000 saved for one year to exceed their savings allowance limit. Higher-rate taxpayers face a lower threshold, with a 42% tax rate kicking in when savings interest exceeds £500 annually, up from the current 40%. Additional rate taxpayers will see their tax rate rise from 45% to 47% on all savings interest.

ISA savings remain tax-free, with the annual limit at £20,000 across all ISA accounts. However, starting April 2027, individuals under 65 will be restricted to saving £12,000 yearly in a cash ISA. The overall ISA limit will remain at £20,000, allowing for a combination of cash and stocks and shares ISAs. Over-65s remain unaffected by the new cap and can continue to save up to £20,000 annually in a cash ISA.

Various types of ISAs are available, including cash ISAs, stocks and shares ISAs, Lifetime ISAs, and innovative finance ISAs, with Junior ISAs designed for children. Sarah Coles, head of personal finance at Hargreaves Lansdown, highlighted the importance of tax-efficient saving, emphasizing the protection offered by cash ISAs amidst the changing tax landscape.