Major ISA Overhaul: What You Need to Know
Chancellor Rachel Reeves has unveiled a significant reform to the Individual Savings Account (ISA) system in her Labour Party Budget, a move that will impact millions of savers across the UK. The most notable change is a reduction in the annual cash ISA allowance, which will be slashed from £20,000 to £12,000 for individuals under the age of 65.
A Two-Tier System to Encourage Investment
Announcing the changes in the House of Commons, the Chancellor explained that the reform is designed to address the UK's low levels of retail investment compared to other G7 nations. From April 2027, the overall ISA allowance will remain at £20,000. However, £8,000 of this allowance will be designated exclusively for investment in stocks and shares ISAs. This creates a new two-tier system aimed at steering savers towards potentially higher-return investments.
Ms. Reeves justified the policy by stating, "Someone who's invested £1,000 in an average stocks and shares ISA every year since 1999 would be £50,000 better off today than if they'd put the same money into a cash ISA." She also highlighted that major financial institutions, including Hargreaves Lansdown, HSBC, and Barclays, have committed to launching new online hubs to help guide savers.
Exemption for State Pensioners
A crucial exemption to this new rule applies to state pensioners. Individuals aged 65 and over will retain the full £20,000 cash ISA allowance, shielding them from the reduction. The Chancellor confirmed this protection, stating, "with over 65s retaining the full cash allowance."
In other budget measures, the Chancellor also announced the maintenance of all Income Tax and National Insurance thresholds at their current levels for a further three years from 2028. A specific measure will ensure that individuals receiving only the basic or new State Pension will not have to pay small amounts of tax through Simple Assessment from April 2027.
Industry Reaction and Calls for Further Action
The financial industry has responded to the announcement. Stephen McGee, chief executive of Scottish Friendly, commented that while the direction is encouraging, the government could have gone further. He suggested that "the cap ideally needs to be set at around £8,000" to more effectively shift saver behaviour and support long-term wealth creation, noting the vast sums currently held in cash ISAs that often fail to beat inflation.
This major ISA shake-up marks a significant shift in government policy, aiming to foster a stronger investment culture in the UK while providing specific protections for older savers.
