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The amount that can be saved into cash individual savings accounts (ISAs) will fall from £20,000 to £12,000 from April 2027, the Chancellor announced in her November Budget, although over-65s will be exempt from the reduction.
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 alone, almost double the amount that was paid into these accounts in September.
Alice Haine, personal finance analyst at Bestinvest by Evelyn Partners, said: “Those that did shovel more funds into these accounts were likely to have been spurred by speculation that cash ISA subscriptions could be capped well below the current £20,000 limit.”
For now, 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 made this change, and what it could mean for you.
Why is the amount that under-65s can put into a cash ISA being restricted?
The government claims that its changes to the cash ISA allowance for those aged under 65 is to encourage more savers to invest rather than leave their money sitting in deposit accounts.
Rob Morgan, Chief Investment Analyst at Charles Stanley, said: “The rationale behind the move is that Brits would be better off diverting money into the stock market and other assets to gain a better long-term return, but there are concerns that some people who are unable to take risks with their money will see their tax-free options curtailed.”
How much could the cash ISA allowance cut cost me?
The restricted cash ISA allowance from 2027 is likely to 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?
Laura Suter, director of personal finance at AJ Bell, said: “If you look at one year alone, and assume 4% interest on the cash, it doesn’t represent a huge sum of interest: just £320. This means it’s covered by the Personal Savings Allowance for both basic-rate and higher-rate taxpayers, assuming they have no other taxable savings, and lands additional-rate taxpayers with a £150 tax bill. But over a number of years the tax bill really adds up.
“Over five years the total bill for an additional-rate taxpayer is £2,380 and over 10 years it totals a whopping £9,349 extra in tax. Even a basic-rate taxpayer, who gets a £1,000 tax-free allowance each year for their savings interest, will see a £240 tax bill after five years and a chunky £2,402 bill over the 10 years.”
Can I not simply put my £20,000 allowance into a stocks and shares ISA but hold it in cash or low-risk money market funds?
Immediately following the Budget, there was speculation that savers using the full £12,000 in a cash ISA would be able, as they can now, to add a further £8,000 to a stocks and shares ISA and opt for a low-risk investment such as a money market fund, or simply park their money in cash. Many investment platforms, such as Hargreaves Lansdown and Bestinvest, enable people to open stocks and shares ISAs with cash that is awaiting investment, and often pay decent returns on these cash holdings.
However, HMRC has indicated that there will be a potential charge on cash or other low-risk investments held within stocks and shares ISAs to prevent savers from circumventing the new rules.
Critics argue that blocking money market funds within stocks and shares ISAs would undermine the very purpose of ISAs, which is to support safe, flexible investment. Money market funds invest in cash deposits, particular financial instruments (monetary contracts between two parties which can be traded) and high-quality bonds which pay a return that’s similar to holding your money in cash. They usually appeal to investors who are seeking a safe haven for their stocks and shares ISA money during periods of economic uncertainty.
Mark Burges Watson, co-founder of Kaldi, an app that lets you save or invest cashback from your everyday spending, said: “These funds are among the safest short-term investment options – low-risk, cash-like, and currently yielding over 4%, far higher than instant-access cash ISAs at high street banks. They also offer full tax advantages and allow investors to use their entire £20,000 ISA allowance, unlike restricted cash ISAs.
“With the cash ISA allowance cut to £12,000, millions of savers will be forced into taxable accounts for their excess savings. Money market funds serve as an ideal stepping stone, letting savers park money securely while deciding how to invest or managing short-term market volatility. HMRC could have a tough time enforcing these restrictions, as money market funds are classified as investments, carry a ‘Capital At Risk’ warning and are not covered by the Financial Services Compensation Scheme. They are also clearly loan stock.”
What if I pay £20,000 into a stocks and shares ISA and then transfer it to a cash ISA?
Under current flexible ISA rules, savers can transfer from a stocks and shares ISA into a cash ISA and vice versa. That means in theory, once the rules change there would be nothing to stop someone opening a £12,000 cash ISA and up to £8,000 in a stocks and shares ISA on top, only to then transfer the latter into a cash ISA soon after.
However, to stop this from happening, HMRC has suggested that restrictions will also apply to ISA transfers from stocks and shares ISAs to cash ISAs. Mr Stanley said: “ It’s perfectly reasonable for people to do this as their needs change, for example when the time approaches to draw on the money in the event of a house purchase or large renovation.
“If ISA transfers are a one-way street to stocks and shares from cash, until the age of 65, the system stands to be further siloed. It makes it harder for people to change course from investing as their circumstances evolve, especially in the absence of cash equivalent options in a stocks and shares ISA.
“At this stage the proposals are not final, they are subject to industry consultation and are yet to be written into law. There is opportunity for debate on the key aspects of the proposals to align government intentions with the practicalities faced by ISA providers, investment professionals and DIY investors. We urge investors to keep in mind that any changes are subject to this, and in any case won’t be implemented until April 2027.”
What can I do ahead of these changes?
Many savers will want to take advantage of existing ISA rules while they still can, especially as they will also face other obstacles when it comes to cash savings.
Ms Haine said: “That includes the unexpected savings income tax hike from 2027 and the extension to the income tax threshold freeze to 2031 – which will either drag millions more people into taxable territory for the first time or into higher tax bands as their earnings rise. This raises the risk of many more people breaching the Personal Savings Allowance. It’s fiscal drag on steroids.”
As well as making use of your ISA allowance before it reduces (if you’re aged under 65), it’s worth making sure you’re earning as much interest as possible on all your cash savings.
Ms Haine said: “Savings rates have been easing in recent months, reflecting five interest rate cuts since August last year, though the effective rate on new fixed-term bank and building society accounts edged up slightly in October to 3.84% from 3.82% in September, despite October’s softer inflation and a close vote at the latest Monetary Policy Committee meeting. The markets are expecting a sixth interest rate cut in December and further reductions in 2026, so savings rates may only worsen in the months ahead.
“Locking in a competitive savings deal now, rather than leaving money to fester in an account where the headline rate has long expired, ensures your nest egg works as hard as possible in an increasingly challenging environment for savers.”
Will there be any change to Junior ISA allowances?
Under current rules, parents can put up to £9,000 into Junior ISAs per child each tax year. As with the normal ISA allowance, this can be split between stocks and shares or cash, or a combination of these. There were no changes to Junior ISAs announced in the Budget, despite the fact that experts claim that a restricted cash element may be more useful for this type of ISA than standard ISAs.
Jason Hollands, managing director of Bestinvest, said: “Given these accounts cannot be accessed until the child turns 18, in most cases they are long-term in nature, it has always struck me as disappointing that the majority of JISA accounts subscribed to go into cash rather than investments.
“The Chancellor says she wants more people to benefit from investing: a good place to have started would therefore have been driving these accounts towards investing rather than cash. After all, if young people can see the benefits of investing at the start of their adult lives, wouldn’t that be a great thing for changing behaviour?”
You can find out more about how Junior ISAs work and about ISAs more generally in our guide Everything you need to know about ISAs.
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