Government announces changes to savings accounts, ISAs and pensions in autumn budget

The UK government has announced significant changes to Cash ISA limits and pension contribution rules as part of a comprehensive budget that included more than 20 announcements affecting savers and investors. According to experts from Hargreaves Lansdown, the annual Cash ISA allowance will be reduced from £20,000 to £12,000 starting in 2027, with a carve-out provision for individuals aged 65 and over who will retain the full £20,000 allowance.

The budget, delivered on 26th November, also confirmed a 4.8 percent increase in state pensions from April under the triple lock mechanism. However, the announcement included restrictions on salary sacrifice arrangements for pension contributions, limiting National Insurance relief to £2,000 annually from 2029.

Cash ISA Changes Impact Younger Savers

The reduction in Cash ISA limits presents particular challenges for younger savers who may need access to funds within five years, such as those saving for house deposits. Sarah Coles, Head of Personal Finance, explained that individuals with short-term savings goals should typically keep money in cash rather than investments, potentially exposing them to income tax liability once the new limits take effect.

Additionally, the changes may affect the traditional pathway from saving to investing. According to industry analysis, many investors begin by building confidence through Cash ISAs before transferring funds into Stocks and Shares ISAs, and the reduced limits could constrain this natural progression.

Income Tax Thresholds Frozen Until 2031

The government extended the freeze on income tax thresholds through 2031, three years longer than the previously announced 2028 deadline. This fiscal drag will pull more workers into higher tax brackets as wages increase, affecting not only income tax rates but also dividend tax and savings interest tax calculations.

Meanwhile, the budget introduced a two percentage point increase across all non-employment income tax rates, including savings interest, dividend payments, and rental income. This change aims to align taxation more closely with earned income, though it represents an additional burden for savers and investors operating outside tax-sheltered accounts.

Pension Salary Sacrifice Rules Modified

Helen Morrissey, Head of Retirement Analysis, noted that restricting National Insurance relief on salary sacrifice pension contributions above £2,000 annually could reduce incentives for workers to contribute beyond auto-enrollment minimums. The modification raises concerns about pension adequacy at a time when retirement savings remain a policy priority.

However, the government confirmed it would not reduce the tax-free cash allowance available from pensions, contrary to widespread speculation. This decision provides relief for retirees who rely on this provision, though individuals who withdrew funds prematurely to avoid rumored cuts now face questions about reinvestment strategies.

Investment Incentives and Market Response

The Chancellor announced positive measures for investors, including new investment hubs launching next year and a three-year stamp duty holiday for new listings on the London Stock Exchange. The current 0.5 percent stamp duty on share purchases will be waived for new listings, making British investments more attractive.

Nevertheless, hidden within the budget documentation was a reduction in Venture Capital Trust tax relief from 30 percent to 20 percent, effective after the 2025-2026 financial year. Emma Wall, Chief Investment Strategist, indicated investors have until the end of this tax year before changes take effect.

Consultation on Lifetime ISA Replacement

The government announced plans to consult on replacing the Lifetime ISA with a different product designed to support property buyers. Details of the consultation remain pending, though officials emphasized the importance of providing continuity for current Lifetime ISA holders.

Market reaction to the overall budget proved relatively positive, with gilt yields stabilizing after initial volatility and the pound strengthening against the dollar. The FTSE 100 experienced a relief rally, particularly among banking stocks that avoided anticipated levy increases.

Further details on the Lifetime ISA consultation and administrative changes for state pension taxpayers are expected to emerge throughout the coming year as implementation timelines approach.