What is an Isa and when will the cash saving limits changing?

Chancellor Rachel Reeves announced in the Budget that the amount of money that can be saved in tax-free cash in Individual Savings Accounts (ISAs) will be reduced from £20,000 to £12,000 a year for under-65s.

The Treasury is expected to encourage more investment in stocks and shares.

Isa is a savings or investment product that is treated differently for tax purposes. You can get a cash ISA and a stocks and shares ISA.

ISAs are offered by many banks, building societies, investment companies and other financial providers.

Any returns you make from an ISA are tax-free, but there is a limit on how much money you can put in each year.

The current £20,000 annual allowance can be used in one account or spread across as many ISA products as you wish.

These accounts do not automatically close at the end of the tax year. When the next tax year starts, you can open a new ISA or – in some cases – continue to put money into your existing accounts.

You must be 18 years of age to open an ISA. You must live in the UK or be a member of the armed forces, or be a so-called Crown Servant working abroad.

In the Budget, the Chancellor said the annual tax-free allowance for Cash Isa for under-65s would be reduced from £20,000 to £12,000.

The change will be introduced in April 2027.

The government wants to “ensure that people’s hard-earned savings are delivering the best returns and driving more investment into the UK economy”.

Plans are being made to encourage people with high levels of savings to invest in stocks and shares.

There will be advertising reminiscent of the “Tell Sid” campaign of the 1980s, which encouraged people to invest in the newly privatized British Gas.

Banks will also send targeted messages to those who have money in their accounts at low interest.

The Chancellor said people over the age of 65 will still be able to save up to £20,000 in cash.

The annual tax-free allowance for Stock and Share Isas will also remain at £20,000.

Cash ISAs are usually offered by banks or building societies, and function like a normal savings account.

Savers pay in money and the interest gets added on top.

In regular savings accounts, once the interest goes above a certain limit, you start paying income tax.

A basic rate taxpayer can earn £1,000 in savings interest a year before paying tax. The limit for higher rate taxpayers is £500, but additional rate taxpayers have no allowance – they pay tax on all their savings income. Those with low income may get additional allowance.

However, when money is saved in a Cash Isa, the interest is tax-free, no matter how much you earn.

Cash Isas are very popular, with millions of savers holding billions of pounds.

Stock and share ISAs work in much the same way.

However, rather than simply being held in a savings account, the money is invested in shares of companies, unit trusts, investment funds or bonds.

Unlike other investments, any returns are protected from income tax and capital gains tax.

Importantly, while the returns may be high, the risks are also high. The amount of money you have in a stock can go down as well as up.

junior isas Allow young people to save – or let their parents save for them – until they turn 18 – when they can access regular Isa.

Lifetime Isas (Lisas) are designed to help people save when buying a first home, or towards retirement. Savers can invest up to £4,000 a year and the government adds an extra 25%. However, in the Budget the government said it planned to replace LISA. Critics have argued that their working rules are too strict, and that some savers have breached property purchase price limits.

The innovative Finance ISA lets people access other types of financial arrangements, such as peer-to-peer lending, without having to contact a bank.

The government hopes that encouraging people to invest in stocks and shares can benefit British companies and boost economic growth.

Many investment companies that sell stocks and shares support such a move, while the banks and building societies that dominate the cash Isa market are more cautious.

Those in favor say that there are billions of pounds lying in savings accounts, which do not need to be withdrawn quickly.

He says that if that money is invested instead of keeping it in savings accounts, savers can benefit, as well as the broader economy.

They want reforms to encourage individual investment.

However, opponents said there was little evidence that people would turn to stocks and shares if cash Isa were made less attractive.

He warned that many people would probably not be able to save at all, or would pay more tax on any money held in non-ISA accounts.

In particular, building societies pointed out that it would also reduce the amount of money they receive from savers’ deposits, which could then be lent out as mortgages or other loans.

As a result, borrowing costs may increase.