Chancellor Rachel Reeves reduced the tax-free cash ISA allowance for savers under 65 from £20,000 to £12,000. The move, intended to encourage investment rather than cash saving, will force savers to pay tax on the remaining £8,000 if they continue to deposit the full £20,000 annually.
Investment firm AJ Bell analysed the potential impact. Over five years, additional-rate taxpayers could pay £2,380 extra, assuming a 4% interest rate on the excess savings. Higher-rate taxpayers would see a £1,152 increase over five years, rising to £6,464 over ten years. Basic-rate savers face smaller impacts, losing £240 over five years and £2,402 over ten.
The budget also raised interest tax rates from April 2027:
- Additional-rate taxpayers: 47% (up from 45%)
- Higher-rate taxpayers: 42% (up from 40%)
- Basic-rate taxpayers: 22% (up from 20%)
Laura Suter from AJ Bell warned, “Cutting the cash ISA allowance for under-65s will lead to bigger tax bills. It’s presented as a way to encourage investing, but it also acts as a huge cash cow for the government.”
Income tax thresholds were also frozen until 2031, meaning that inflation-driven wage increases could push millions into higher tax bands, increasing the tax burden on their savings. HMRC and the Treasury were contacted for comment.
