Significant changes are on the horizon for Individual Savings Accounts (ISAs) and other savings accounts. An ISA is a savings account where the interest earned is always tax-free. However, the rules governing ISAs are set to become more intricate starting in April 2027.
The cash ISA limit will be reduced from next year, but this change will only affect younger savers. Additionally, a new charge will be imposed on cash held in stocks and shares ISAs.
Moreover, the tax rate on savings interest outside of ISAs will be raised, and a new First Time Buyer ISA will be introduced in April 2028 to replace the Lifetime ISA.
From April 2027, the annual cash ISA limit will drop from £20,000 to £12,000 for individuals under 65 years old. However, there will still be an overall £20,000 ISA limit, allowing savers to allocate funds between different types of ISAs.
Individuals over 65 will retain the ability to save up to £20,000 in a cash ISA each tax year. To prevent circumvention of the new cash ISA limit rules, a 22% levy will be imposed on interest earned from cash in stocks and shares ISAs.
Furthermore, savers will be restricted from holding their entire non-cash ISA portfolio in Money Market Funds, and transferring funds from a non-cash ISA to a cash ISA will be prohibited.
A new First Time Buyer ISA will replace the Lifetime ISA, focusing solely on assisting individuals in purchasing their first home. Unlike the Lifetime ISA, the First Time Buyer ISA will not cater to retirement savings.
The property value threshold for the First Time Buyer ISA has not been disclosed yet. For savings outside of ISAs, interest earnings exceeding a specified amount in a tax year are subject to taxation.
Basic-rate taxpayers can earn up to £1,000 in savings interest annually tax-free. Any excess amount is taxed at 20%, which will increase to 22% from April 2027. Higher-rate and additional rate taxpayers face higher tax percentages on savings interest exceeding certain thresholds.
