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The Chancellor John Healey announced that a planned reduction in the amount that under-65s can save into cash individual savings accounts (ISAs)l from April 2027 will be scrapped.
Cash ISAa are incredibly popular with risk-averse savers, as returns are free from income tax. According to latest Bank of England data, £4.2 billion was paid into cash ISAs in October 2026 alone, almost double the amount that was paid into these accounts in September.
The government u-turn means that cash savers can still put up to £20,000 into cash ISAs in both the current 2025/26 and the next 2026/27 tax year, sheltering a potential £40,000 of savings from tax before the changes come into effect in the 2027/28 tax year.
Here, we look at why the government has scrapped the proposed changes, and what it could mean for you.
Why did the government originally want to restrict the amount that under-65s could put into a cash ISA?
The government claims that its proposed changes to the cash ISA allowance for those aged under 65 were to encourage more savers to invest rather than leave their money sitting in deposit accounts.
However, critics said that if the restricted cash ISA allowance had gone ahead, it would likely prompt many risk-averse savers to simply leave their money in non-ISA accounts and so pay tax on their savings interest. This would mean that once they breach their Personal Savings Allowance, they’d have to pay tax on their savings interest.
The Personal Savings Allowance enables savers to automatically receive a certain amount of interest without tax being taken off. For basic rate taxpayers this allowance is £1,000, for higher rate taxpayers it’s £500 and additional rate taxpayers don’t get any allowance. Find out more about how it works in our article What is the Personal Savings Allowance?
Jason Hollands, managing director at online investment platform Bestinvest by Evelyn Partners (now part of NatWest Group), said: “The Government had argued that the rationale for cutting the Cash ISA allowance was to steer more people to invest, rather than it being a revenue-raising measure. Encouraging more people to invest is a worthy and welcome project but cutting the amount people can save in a Cash ISA seemed like a blunt instrument to try and achieve this. Further complications around flagged anti-circumvention measures for investment ISAs threatened to damage understanding of and trust in both products.
“I suspect many of those who would have felt limited by the planned reduction to Cash ISA allowances for under 65s would simply have put their cash in a taxable savings account instead, making them worse off.
“Getting more people to invest requires a cultural shift, better education, the new targeted support regulatory regime to bed in and more creative ways to make investing more accessible to more people, e.g. through exploring ideas like offering regular investing schemes through the workplace.”
Were any other changes to savings announced in the 2026 Budget?
Yes, the Budget small print said that the rates of tax paid on savings interest above the Personal Savings Allowance will rise by four percentage points in total from April 2027, making it even more important that savers understand the value of tax-efficient options.
The increase will take the tax rates on savings interest to 24% for basic rate taxpayers, 44% for higher rate taxpayers and 49% for additional rate taxpayers.
However, there are steps savers may be able to take to mitigate the tax hike.
Mr Hollands said: “First, review whether the balance of wealth held between cash and investments is right for you. Having a cash rainy-day fund is very wise; it can help cover unexpected bills and avoid having to sell investments at the wrong time. But holding more cash than you need for several years can mean missing out on the potential for longer-term investment growth, and now the much tougher tax treatment of savings interest than gains on investments and dividend income is a further consideration. Of course, investments involve more risk as markets can fall as well as rise, so this course of action won’t suit everyone.
“Second, both the looming tax increases on cash savings and already implemented hikes on CGT and dividend taxes make maximising ISA allowances incredibly important whether you’re a saver or an investor.
“Third, couples who are married or in a civil partnership should look at their savings and allowances together. Each person has their own Personal Savings Allowance, ISA allowance, as well as annual exemptions on capital gains and dividends. If such allowances are exhausted but one partner pays tax at a lower rate, transferring cash to them could reduce an overall family tax bill. But this needs to be a genuine transfer: the money becomes theirs, legally and in practice, and they must be free to decide what to do with it, so trust is key.”
Savers might also want to consider Premium Bonds from National Savings & Investments. You can hold up to £50,000 in Premium Bonds, with each £1 invested giving you an entry into the monthly prize draw. Any winnings are free from tax, although there is no guaranteed return and the amount you earn, if anything, will depend on whether you win a prize. NS&I can also change the prize fund rate and odds over time.
Another option for those who can afford to tie up some of their money is to look at short-dated, low-coupon gilts. These are government bonds, and some were issued when interest rates were much lower. As a result, they can now be bought for less than the amount investors will receive when they mature.
Although the regular interest payments, known as coupons, are subject to Income Tax, any profit made from an increase in the gilt’s value is exempt from Capital Gains Tax. This means that investors who hold gilts until maturity may receive much of their overall return as a tax-free capital gain, potentially making them more tax-efficient than keeping the same money in a savings account. This could be particularly appealing to higher and additional-rate taxpayers, especially following the Budget’s changes to the taxation of savings income. Learn more in our article How gilts can protect your savings from tax.
Isabella Galliers-Pratt, Senior Investment Director at Rathbones, said: “The decision to increase tax on savings income to 24%, 44% and 49% from April 2027 makes holding large amounts of cash on deposit increasingly unattractive, particularly for higher and additional-rate taxpayers.
“Cash will always have an important role in providing liquidity, but the tax changes significantly alter the equation for money held beyond immediate needs. For an additional-rate taxpayer facing a 49% rate on taxable savings income, a 4% savings rate would deliver just 2.04% after tax.
“For those holding substantial excess cash, that growing opportunity cost will become increasingly difficult to ignore.”
You can find out more about about ISAs in our guide Everything you need to know about ISAs.
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