Investor Insights: Budget ISA reforms and tax on savings going up

Amongst a heap of tax and spend measures the Chancellor, John Healey, used his Budget to unveil changes to ISAs and further hikes on unearned income.

Firstly, the reduction in the cash ISA allowance for under-65sfrom £20,000 to £12,000 has been scrapped, following a backlash from a range of sources. 

Second, there were changes to the Lifetime ISA: first-time buyers purchasing a home above the £450,000 cap can now do so with a reduced penalty. The withdrawal charge will be cut from 25% to 20%. Replacing this system a new first-time buyer ISA will come in from April 2029. This will be pretty much the same as before but without the upper age limit or withdrawal penalties

Thirdly, Healey announced a new 'Starter ISA' to get more people investing.No detail on this yet but anything that encourages people to start investing would be welcome. In the meantime, investors should be mindful to maximise their full stocks & shares ISA allowance before the next year starts in April.

Meanwhile, from April 2027 the rate of tax on savings interest will increase by a further two percentage points on top of the 2% increase already announced by Rachel Reeves a year ago.

It means a basic rate taxpayer will pay 24% in tax on interest earned over their £1,000 allowance, while a higher rate taxpayer will face a 44% charge over their £500 limit. Additional rate taxpayers face a 49% on all savings interest earned outside of an ISA. The 2% additional hike will also apply to rental income for landlords.

There was no change on the main Capital Gains Tax rates or allowances. But the government is reducing the lifetime limit for capital gains eligible for Business Asset Disposal Relief (BADR), which reduces CGT from the standard 24% to 18%, from £1 million to £500,000 from April 2027.Instead, the chancellor announced a founders’ relief scheme, which will cut CGT bills to 10% on the first £10mn of lifetime capital gains for those who owned at least 25% of shares at the founding of the company.

Despite speculation the government chose not to remove, limit, or uprate CGT at death, so assets that accrue to someone upon death will continue to be subject to the CGT 'uplift' effect.

The dividend tax regime was left unchanged, with the tax on dividends having already been hiked two percentage points last year to 10.755 for basic rate taxpayers, 35.75% for higher rate taxpayers and 39.35% for additional rate taxpayers. However, the government did confirm it will go ahead with a comprehensive overhaul of the taxation of distributions (dividends) from 6 April 2028, which will reclassify certain transactions as income rather than capital gains.

There were many sector specific changes that may have affected your portfolio, to the likes of bookies, banks, housebuilders and defence stocks. A plunge in housebuilder shares sent the FTSE 250 lower on the day of the Budget, whilst the FTSE 100 eked out a small gain.