Rachel Reeves’ second Autumn Budget contained so many disparate measures that some analysts have dubbed it the “smorgasbord statement”. The breadth of this Budget has made it difficult to get to grips with the impact of the Chancellor’s announcements on individual areas of your finances – including on your savings. But there were certainly plenty of reforms for savers to think about.
All change for Cash ISAs
The Chancellor’s headline announcement for savers was that from the 2027-28 tax year onwards – starting on 5 April 2027 – the amount of money you can put into a Cash Individual Savings Account (ISA) will fall by 40%. In the current tax year, you can put £20,000 into a Cash ISA; from April 2027, this will come down to £12,000.
There are some important caveats here. First, the change only applies to the under 65s. If you’re 65 or over, you’ll continue to have access to a £20,000 Cash ISA annual allowance.
Also, Britons of all ages will still be allowed to invest up to £20,000 in ISAs overall each year. So once you’ve used your full £12,000 allowance, you’ll have another £8,000 of ISA allowance you could use for, say, a Stocks and Shares ISA.
The Chancellor’s aim is to encourage people to save less money in cash and more in stock market assets – particularly the shares of UK companies; these assets have the potential to deliver superior returns over the long term, albeit with increased risk.
But many savers will be disappointed by the lower Cash ISA allowance. All interest earned on savings held within a Cash ISA is completely tax-free and these accounts pay some of the most generous interest rates in the current savings market. United Trust Bank’s Cash ISA accounts, for example, currently offer rates of up to 4% Gross/AER* a year.
More tax to pay on savings interest
The Chancellor also announced an increase in the rates of income tax that savers pay on interest earned from accounts that are not tax-free; that’s most bank and building society savings products other than Cash ISAs.
These rates will all rise by 2 percentage points from April 2027. That means basic-rate taxpayers will pay 22% tax on savings interest; higher-rate taxpayers will pay 42%; and additional-rate taxpayers will pay 47%.
Don’t forget the personal savings allowance, which allows most people to earn a certain amount of interest before income tax is due. Basic-rate taxpayers get a £1,000 allowance each year – in an account which pays 4% Gross/AER*, savers on the basic rate of tax would therefore need to have a deposit of at least £25,000 before they have to worry about tax on interest.
However, the personal savings allowance for higher-rate taxpayers is only £500, meaning deposits of more than £12,500 in the same account could generate a tax liability. And additional-rate taxpayers don’t get any personal savings allowance at all.
These higher tax rates on savings interest will add insult to injury for many people. The Chancellor has not only substantially reduced the amount you’ll be able to put into tax-free savings each year via Cash ISAs but also increased the tax you may have to pay on cash savings held elsewhere. You can find more information on the HMRC website.
Income tax thresholds frozen
Whether you need to pay tax on your savings interest – and how much – will ultimately depend on your total income. For example, if your total income for the year, including your salary or earnings, falls within the basic-rate tax band, you’ll pay basic-rate tax on any savings interest where tax is due.
However, it’s possible that savings interest will drag you into a new tax band. If your salary puts you just below the threshold when you start paying income tax, say, or just below the higher-rate tax threshold, savings interest could take you over the edge. That will increase the tax that is then due on this money – as you pay at a higher rate, but also if you lose any of your personal savings allowance.
The ongoing freeze in income tax thresholds therefore has the potential to catch more savers out, as their income rises or they save more (or both). Before the Budget, income tax thresholds were due to remain frozen until the 2027-28 tax year; now, however, the Chancellor has extended the freeze until at least 2030-31, compounding the problem for savers.
LISAs to be abolished
Lifetime ISAs (LISAs) are specialist accounts aimed at savers who are trying to amass a deposit to put down on their first property purchase, or to build up a nest egg for retirement. The rules on contributions and withdrawals are more complex than on other ISAs, but a 25% bonus from the Government on contributions to LISAs of up to £4,000 a year has proved attractive for many savers.
Now, however, LISAs look set to be abolished. In the New Year, the Chancellor will publish proposals or a new savings scheme aimed at first-time buyers. Once this is in place, LISAs will be discontinued, though savers who have already opened an account will be protected.
Interest rates to fall?
The mixed outlook for the UK economy could pave the way for the Bank of England’s Monetary Policy Committee to make further cuts to interest rates. Economists say that if the Office of Budget Responsibility’s projections of reduced growth and productivity prove accurate, it is likely that the Bank of England will be more aggressive with interest rate cuts than was previously expected. In the City, the odds of a rate cut in December have already reduced. Lower Bank of England base rates would feed through into lower interest rates for savers.
The rest of the smorgasbord
Don’t forget that many other budget changes could have a knock-on effect on your ability to save and how you do it. The extended income tax threshold freeze, for example, has the potential to reduce your income after the effects of inflation, reducing the amount you have available for savings; tax changes ranging from new duties on electric vehicles to increased rates on property and dividend income could add to the impact.
Tough new rules on salary sacrifice schemes for pension savings, due to come into force in 2029, may prompt a rethink of how you’re saving for retirement. The Chancellor has also announced changes to the venture capital trust and enterprise investment scheme initiatives. And some people will face higher tax bills related to their properties, if these are worth more than £2m.
The bottom line? Make sure you understand the direct impacts of the Budget on your savings – but also take into account the rest of the Chancellor’s announcements.
*AER stands for Annual Equivalent Rate and illustrates what the interest rate would be if interest was paid and compounded once each year. Gross is the interest rate without the deduction of income tax. Interest is paid gross into your account.
Although this article may contain helpful information and tips, these are not personal advice. You may wish to seek advice from a financial advisor if you are unsure what’s best for your own personal circumstances.