Half a million savers may be hit with unexpected tax bills of up to £1,080 after HM Revenue & Customs (HMRC) changed the rules on Cash ISAs. The recent reduction of the annual Cash ISA allowance from £20,000 to £12,000, introduced by Labour Party Chancellor Rachel Reeves, is forcing many to reconsider where they hold their savings.
In the 2022/23 tax year, 7.1 million people contributed to Cash ISAs, with over a quarter exceeding the new £12,000 cap. Among them, approximately 1.5 million were basic-rate taxpayers, and 462,000 were higher-rate taxpayers, who now face potential tax liabilities on the amount contributed above the new limit.
Andrew Prosser, Head of Investments at InvestEngine, explains the implications: “Nearly 1.5 million basic-rate taxpayers and close to half a million higher-rate taxpayers put more than £12,000 into their Cash ISAs last year. With the allowance lowered, they must now find alternative savings options for the excess amount.”
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If those savers redirect the £8,000 difference between the old and new limits into a standard savings account offering 4.5% interest, they could incur tax losses over time. Prosser highlights, “Over five years, a basic-rate taxpayer could lose around £288 in tax on interest earned from the excess cash, while higher-rate taxpayers might face losses up to £1,080, or roughly £216 annually once their total interest exceeds the £500 tax-free allowance.”
While the cut presents challenges, Prosser sees it as an opportunity. He suggests that savers lacking investments might use this shift to explore ISA options beyond cash savings. “By reallocating amounts above £12,000 into Stocks & Shares ISAs, savers can maintain the full £20,000 annual ISA allowance and potentially benefit from returns that outpace inflation,” he said.
Chancellor Reeves has maintained the overall ISA maximum limit of £20,000 per year but slashed the cash ISA component by 40%. This change excludes individuals over 65, who retain the previous £20,000 cash ISA limit. The Treasury argues the shake-up encourages better returns and increased investment among savers.
As these changes take effect from April 6, 2027, savers who used to rely primarily on Cash ISAs will need to adjust their strategies to avoid unexpected tax charges and optimize their savings growth.