The Government has announced a major change to the cash ISA allowance and other reforms to the ISA system alongside a hike in savings income tax rates.
The changes bring major changes for UK savers contributing cash into the tax-free accounts, with potentially far-reaching consequences.
Under the plans announced by the Chancellor, the annual tax-free allowance for cash ISAs will be reduced from £20,000 to £12,000 starting in 2027 for most savers.
However, savers aged over 65 will be allowed to keep the current £20,000 limit.
The reform is part of a broader effort to shift savings away from low-yield cash accounts and toward greater investment in equities and other higher-growth assets via stocks and shares ISAs or other investment vehicles such as pensions.
By lowering the cash ISA cap, the Government also aims to channel more capital into the domestic stock market, encouraging savers to seek higher returns rather than parking funds in cash.
The overall annual ISA contribution limit of £20,000 remains unchanged. That means savers can still subscribe to ISAs up to £20,000 each tax year, it is the mix that is likely to shift, with less allocated to cash and more toward investments.
The Government has also announced plans to reform Lifetime ISAs (LISAs) with recommendations to come in 2026. It says it wants to simplify the LISA as a financial product but for now there is no further detail.
For savers, these reforms raise a number of questions.
If you typically rely on a cash ISA and were saving toward long-term goals, a reduced annual allowance means you might have to spread contributions more carefully or accept that you can save less tax-free on cash savings.
The Government has also hiked the tax rate on savings income by two percentage points across all bands from April 2027. This means cash held outside of an ISA wrapper could be subject to more tax on the earned interest.
On the other hand, stocks & shares ISAs may become more appealing, though they come with the possibility of higher risk and volatility compared with cash.
With the reduction in the cash ISA allowance and the Government encouraging a shift toward investment, now may be a good time to reassess your savings plans.
If you are unsure about the balance between risk, return and ease of access that is right for you, consider speaking to a professional financial planner to help you understand the changes and your options in the future.
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