Cash ISA limit cut and other ISA changes
The Government has announced a significant change to the cash ISA allowance, alongside wider reforms to the ISA system and an increase in savings income tax rates.
These changes will have important implications for UK savers who rely on cash ISAs as part of their financial planning.
Under plans announced by the Chancellor, the annual tax-free allowance for cash ISAs will be reduced from £20,000 to £12,000 from 2027 for most savers. Savers aged over 65 will be permitted to retain the current £20,000 limit.
This reform forms part of a broader strategy to encourage savings to move away from low-yield cash accounts and towards higher-growth assets, such as equities. The Government is seeking to promote greater use of stocks and shares ISAs and other long-term investment vehicles, including pensions.
By lowering the cash ISA cap, the intention is also to direct more capital into the UK stock market, encouraging savers to pursue higher long-term returns rather than holding large balances in cash.
The overall annual ISA allowance of £20,000 will remain unchanged. Savers will still be able to contribute up to this amount each tax year, but the composition of those contributions is likely to change, with less allocated to cash and more towards investments.
Lifetime ISA’s
The Government has also announced plans to reform Lifetime ISAs, with recommendations expected in 2026. While it has stated an intention to simplify the product, no further detail has been provided at this stage.
For savers, these reforms raise several practical considerations.
If you rely primarily on a cash ISA to support longer-term goals, a reduced allowance may require more careful planning. You may need to spread contributions differently or accept that a smaller proportion of your cash savings can be held tax-free.
Increase in the tax rate on savigs income
In addition, the Government has confirmed a two percentage point increase in the tax rate on savings income across all bands from April 2027. As a result, cash held outside an ISA wrapper may be subject to higher levels of tax on interest earned.
Stocks and shares ISAs may therefore become more attractive for some savers, although they carry greater risk and volatility than cash-based options.
With the reduction in the cash ISA allowance and a clear policy push towards investment, now may be an appropriate time to review your savings strategy.
If you are uncertain about the right balance between risk, return, and access to your money, speaking with a professional financial planner can help you understand how these changes affect you and how best to plan ahead.
Sources:
https://www.moneysavingexpert.com/news/2025/11/cash-isa-limit-cut-martin-lewis-budget/
https://www.gov.uk/individual-savings-accounts/how-isas-work
https://www.ftadviser.com/budget/2025/11/26/budget-2025-lifetime-isa-to-be-scrapped/
https://www.gov.uk/government/publications/budget-2025-document/budget-2025-html