What the UK Budget changes mean for your ISAs, savings, and pension

Impact of UK Budget on savings | PA

Expert reaction to Reeves’ statement, when it comes to the impact on personal finances, has been largely downbeat. Commentators are warning that some policies will create more confusion for savers and investors, and little in the way of incentives to put money away for the long-term.

Savings

As predicted, the tax-free cash ISA limit will be cut from £20,000 to £12,000. While £20,000 can still be paid into an ISA each year, £8,000 will be designated for investment - stocks and shares - not cash savings. Only those over the age of 65 will keep the full cash allowance of £20,000. The aim of the cut to the cash ISA limit - effective from April 2027 - is to encourage retail investment.

The Chancellor said that banks will be “able to guide savers to better choices for their hard-earned money”. This is as a result of “targeted support” being introduced from next April to allow financial providers to offer personalised guidance to those who do not have an adviser.

But many are questioning whether the cut to the cash ISA limit will achieve the aim of encouraging more people to invest.

Rachael Griffin, personal tax expert at Quilter, said: “On paper, nudging people away from cash makes sense, but in reality, cash ISAs are deeply ingrained in UK saving habits. Many savers value the certainty they offer, even though over the long term, investing in growth assets typically delivers better inflation-beating returns.”

She added that this change is unlikely to trigger a rush into stocks and shares ISAs and the carve-out for over-65s adds another layer of complexity.

“For basic-rate taxpayers, the impact may be modest, but higher and additional-rate taxpayers could face significant extra tax on savings above the new cap,” said Griffin.

Royal London’s consumer finance expert Sarah Pennells said its research found that six in 10 people with money in cash ISAs could be persuaded to invest in a stocks and shares ISA. But the main barriers to doing so are concerns among consumers that they don’t have enough money to do so and a lack of understanding about investing. “Reducing the cash ISA limit will do nothing to address this,” she said.

Others were more positive about the cash ISA limit reduction, with Richard Stone, chief executive of the Association of Investment Companies (AIC), describing it as “a milestone towards creating a nation of investors”.

The government also announced it will consult on lifetime ISA reform and a new replacement ISA product just for first-time house buyers.

Pensions

In another widely-predicted move, changes have been announced to salary sacrifice arrangements. Salary sacrifice pension contributions above £2,000 will face National Insurance from April 2029.

Under a pension salary sacrifice arrangement, in return for an employee giving up a portion of their salary, the employer pays an equivalent amount into their pension. The amount of salary sacrificed and the corresponding employer pension contributions are currently exempt from both income tax and NI.

The Budget statement said the costs of salary sacrifice relief were set to treble to £8 billion by 2030-31 without reform. It added that “the use of these arrangements has disproportionately benefitted higher earners”.

However, Andrew Tully, technical services director at Nucleus, said the change may reduce take home pay for individuals or, more likely, mean people will save less for their retirement.

He explained: “‘This change sends the wrong message to savers, likely reducing the pension savings many millions will make for their retirement, and particularly hitting those earning around £40,000 to £50,000.

“While government will benefit through increased tax and NI receipts, the knock-on impact on savers will be significant. Pension savings will fall and changes like this also increase the likelihood of a wider impact.”

Steven Cameron, pensions director at Aegon, commented that many will be relieved that the state pension “triple lock” is being honoured, leading to a 4.8 per cent increase, which is above inflation. “However, the sting in the tail is that by 2027/28, the full new state pension will exceed the personal allowance which has today been frozen until 2031, leading to even those relying solely on the full new state pension for retirement income facing a tax liability,” he added.

Tax

While some tax measures vary between Scotland and the rest of the UK, others - such as Inheritance Tax (IHT) - apply across the board. And the Budget confirmed a freeze on IHT thresholds and tax-free allowances for a further year to 2030-31.

Quilter’s Griffin said this will see the government taking in £14.5 billion annually from “grieving families”. “Inheritance tax is one of the UK’s most hated taxes. What was once a tax on only the wealthiest families will increasingly impact those with even relatively modest estates, who after a decade of frozen thresholds alongside rising house prices, will be snagged by the tax,” she commented.

The government also confirmed previously announced measures, including the move to bring unspent pension pots into the scope of IHT. And while the reform of agricultural property relief and business property relief will go ahead, it was announced that the £1 million allowance will be transferable between spouses and civil partners.