Changes to ISAs and the Savings Tax Rate on the Horizon
During the Chancellor’s Budget speech, savers received the unwelcome news that the rate of tax on savings income is to increase and the cash ISA limit to fall. Both changes will take effect from 6 April 2027.
Taxation of savings income
The taxation of savings income is quite complex as a number of factors come into play.
The first complication is the personal savings allowance, which is available to some taxpayers but not all. Basic rate taxpayers have a personal savings allowance of £1,000, whereas for higher rate taxpayers, the allowance is only £500. Additional rate taxpayers do not receive a personal savings allowance.
The second complication is the savings starting rate band. The savings starting rate of tax of 0% applies to savings income within the savings starting rate band, set at £5,000. However, if the taxpayer has non-savings income in excess of their personal allowance, the savings starting rate band is reduced pound for pound.
Where an individual has savings income not sheltered by the personal allowance or the personal savings allowance, it is currently taxed at 20% (basic rate), 40% (higher rate) and 45% (additional rate). From 6 April 2027, savings income will be taxed at two percentage points higher: 22%, 42% and 47% respectively.
In a further twist, the income tax ordering rules are also changed from 6 April 2027, moving away from the principle that reliefs and allowances are allocated so as to give the lowest tax bill.
Cash ISAs
Savers are advised to make use of their cash ISA allowance to keep interest on savings tax-free. With the rise in the savings tax rates from 6 April 2027, using the cash ISA allowance will generate greater tax savings.
However, from 6 April 2027, savers under 65 will only be able to invest £12,000 a year in a cash ISA; the ISA limit remains at £20,000, but at least £8,000 must be invested in a stocks and shares ISA. Savers aged 65 and over can invest the full £20,000 in a cash ISA. Existing ISAs are unaffected by the change.
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