Five Budget changes that could impact your finances

Chancellor John Healey’s first Autumn Budget brought a new strategy for encouraging investment in the UK, a rolling back of the changes announced earlier this year to the Cash ISA and the introduction of a ‘Starter’ ISA with advantages for first-time investors.

However, from April 2027, income tax on savings interest held outside a tax wrapper will increase by two percentage points in addition to the two percentage-point rise already planned.

The Budget also brought some clarity on the new rules for income tax in relation to state pensions, plus penalties for buying a first-time home over the £450,000 limit for Lifetime ISAs have been reduced.

Here are the five policies announced in the Budget that are most likely to impact savers and investors.

Reversing Cash ISA changes

Healey announced a rollback of Cash ISA changes, reverting to the current set-up which allows the full £20,000 ISA allowance to be invested solely in a Cash ISA instead of the £12,000 limit that was scheduled to come into play in April 2027.

The anti-circumvention rules that would have been introduced, including a penalty on any interest earned through cash in a Stocks and shares ISA and limits on holding money market funds, have also been reversed.

Increase to income tax on savings

Income tax on savings interest was already set to increase by two percentage points in April 2027 but will now increase by a further two percentage points for income on savings interest or property across all income bands. This will not apply to tax on dividends or income from work.

The allowances for savings interest will remain the same, at £1,000 for basic rate taxpayers, £500 for higher-rate taxpayers, and no allowance for additional-rate taxpayers. If your personal allowance isn’t used on other income, it can be used to cover your savings interest.

Following the increases, the income tax rates on savings interest beginning April 2027 will be 24% for basic rate taxpayers, 44% for higher rate taxpayers and 49% for additional rate taxpayers.

For someone with £5,000 of savings interest above their tax-free allowances, the hike to savings rates from April will cost an extra £200 a year compared to current rates. Someone with £1,000 of taxable savings interest would pay another £40, while those with £15,000 of savings interest a year would face an extra £600.

The tax increase in pounds and pence is the same regardless of someone’s tax band, however higher-rate and additional-rate taxpayers will see their total bills rise to £2,200 and £2,450 respectively on £5,000 of taxable interest.

“The cumulative effect will be seen over a number of years,” AJ Bell Director of Personal Finance Laura Suter says.

“A higher-rate taxpayer with a £50,000 savings pot earning 4% interest will face £603 more tax over 10 years thanks to the tax increase. For a basic-rate taxpayer with the same amount saved, this will be £437 in extra tax across that period.”

‘Incentive’ for new Stocks and shares ISA investors

Healey mentioned an incentive for those taking their first dive into investing through a new ‘Starter ISA’, but this is still in the development stage, according to HM Treasury.

“The prize for both individuals and the UK economy of getting ISA reform right could be significant,” says AJ Bell director of public policy Tom Selby.

“HMRC data suggests there are around three million people in the UK with £20,000 or more invested in Cash ISAs and no money invested in Stocks and shares ISAs. If just half of that money was invested for the long term, an additional £30 billion of investment would be unlocked.”

While incentives are helpful, if the government moves forward with a new ISA, it could add another layer of complexity to a system which has already seen significant tinkering. AJ Bell has advocated for simplifying ISAs to a single ‘One ISA’ that encompasses both cash and investing.

Lifetime ISA penalty changed

The penalty on Lifetime ISA withdrawals for those using the money to purchase a home over the £450,000 limit will change from a 25% penalty to a 20% penalty as of 29 October. This will mean that investors do not face the prospect of losing some of the money they put into their Lifetime ISA when they opt to buy a home worth more than £450,000, although they will lose the government bonus. If they choose to withdraw the money for a different purpose, they will still face the full 25% penalty.

Starting in April 2029, the First-time buyer ISA will be introduced to replace the current Lifetime ISA. It will have a similar structure, allowing those planning to buy their first home to put in £4,000 each tax year. But, instead of giving the 25% government bonus when the funds are subscribed to the ISA, it will be added when the funds are withdrawn if the value of the home is under £450,000.

The government has clarified that the bonus will be calculated based on the final balance of the First-time buyer ISA, not net contributions. This means that if your money benefits from investment growth while in the First-time buyer ISA, that growth will be matched. The maximum value of any bonus will be £20,000.

Unlike the Lifetime ISA which is only available to open for those under the age of 40 and for new subscriptions up to age 50, the First-time buyer ISA will have no upper age limit. Investors will only be able to hold one First-time buyer ISA at a time and transfers will not be permitted between the Lifetime ISA and First-time buyer ISA.

How the state pension will be taxed

The government confirmed that pensioners with an income at or below the full new state pension will not face income tax. The state pension is set to top £13,000, above the current personal allowance value of £12,570, during the 2027/28 tax year.

The Budget also mentioned the ‘adjusted’ Triple Lock announced in early October. It estimates the changes, coming into play in 2030, will reduce state pension spending by £15 billion a year by the late 2030s and £50 billion in the 2040s. The plan for this change is that the state pension will be adjusted from April 2030 so that it rises each year ‘by the highest of 2.5%, inflation, or the amount required to maintain its value relative to earnings as reached in April 2029’, according to HM Treasury.