A significant reduction in the annual cash ISA limit is poised to hit the finances of millions of UK savers, with some facing tax bills exceeding £1,200. The allowance has been cut from £20,000 to £12,000, forcing many to hold extra savings in taxable accounts.
Millions Exceed New Savings Limit
According to research from investment platform Invest Engine, 7.1 million people paid into a cash ISA during the 2022/23 financial year. Of these, just over two million savers deposited more than the new £12,000 ceiling.
This change means that any savings above the limit must be placed in standard, taxable accounts. Once the interest earned exceeds an individual's Personal Savings Allowance, tax becomes due. The current allowance is £1,000 for basic-rate taxpayers and £500 for higher-rate taxpayers.
The Looming Tax Bill for Savers
With average savings rates around 4.5%, these tax-free thresholds can be breached quickly. Andrew Prosser, Head of Investments at InvestEngine, provided a stark illustration of the potential cost.
"If they were to put that £8,000 – the difference between £20,000 and the new £12,000 limit – into a 4.5% savings account, after five years a basic rate taxpayer will have lost around £264 in tax," Prosser explained. "A higher-rate taxpayer could lose around £1,216, or £234 a year once their total savings interest exceeds the £500 allowance."
His analysis indicates that in the last financial year, almost 1.5 million basic-rate and nearly half a million higher-rate taxpayers saved more than the new limit in cash ISAs.
A Compelling Alternative for Tax-Free Growth
However, the research also highlights a powerful alternative. If a saver invested the same £8,000 excess into a stocks and shares ISA instead of a taxable account, they could be significantly better off over a five-year period.
Invest Engine's projections suggest a basic-rate taxpayer could be £2,200 better off, while a higher-rate saver could see a benefit of nearly £3,800.
"While the cut is undoubtedly a blow for those who were planning to save more than £12,000 into a cash ISA, now is a good opportunity for those who have not invested before to consider it," Prosser advised. "By shifting part of their allowance into a stocks and shares ISA, savers can preserve the tax benefits of the full £20,000 limit while giving their money a chance to benefit from inflation-beating growth."
The rule change, effective from the 2025/26 tax year, underscores the importance of reviewing savings strategies to maximise tax-efficient returns.
