Many changes are on the horizon for ISAs and other savings accounts. An ISA is a savings account where the interest earned is tax-free. However, starting April 2027, the rules are getting more intricate. The cash ISA limit will be reduced, but only for 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 go up, and a new First Time Buyer ISA is set to launch in April 2028, replacing the Lifetime ISA. The annual cash ISA limit will be cut from £20,000 to £12,000 for individuals under 65 years old from April 2027.
Despite the reduction in the cash ISA limit, there will still be an overall £20,000 ISA limit, allowing savers to allocate funds across different types of ISAs. The aim of this cut is to encourage younger people to invest. Over-65s, however, can continue saving 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 from April 2027. Restrictions will also be placed on holding 100% of non-cash ISA portfolios in Money Market Funds.
Furthermore, the new regulations prohibit transferring funds from a non-cash ISA to a cash ISA after depositing £20,000. The upcoming First Time Buyer ISA will exclusively cater to purchasing a first home, unlike the versatile Lifetime ISA, which can serve retirement purposes as well.
While the bonus details for the First Time Buyer ISA are yet to be disclosed, the Lifetime ISA allows for up to £4,000 in annual savings with a 25% bonus. The property value limit for the Lifetime ISA stands at £450,000, but the threshold for the First Time Buyer ISA remains unknown.
For savings outside of ISAs, tax is applicable on interest exceeding a specified threshold each tax year. Basic-rate taxpayers can earn up to £1,000 in savings interest tax-free, with a 20% tax on amounts exceeding this limit, increasing to 22% from April 2027. Higher and additional rate taxpayers face higher tax rates on savings interest over set thresholds.