The government has announced significant changes to Individual Savings Accounts (ISAs) that may affect how much you can save in cash from April 2027.
Although the overall ISA allowance will remain at £20,000, a new £12,000 yearly contribution “cap” on Cash ISAs will apply to those under 65. This is a significant reform, representing the first reduction to the Cash ISA limit since 2017.
The upcoming changes are designed to encourage savers to move towards investment-based products, but they will require many people to rethink their savings strategy.
Understanding how these changes affect you and what options are available can help you make the most of your tax-free allowances.
What’s Changing?
From 6 April 2027, the annual subscription limit for Cash ISAs will be reduced from £20,000 to £12,000 for savers under the age of 65.
This means that if you want to use your full £20,000 ISA allowance, you will need to allocate at least £8,000 to investment products such as Stocks and Shares ISAs.
The change will create a two-tier system based on age. If you are 65 or over on 6 April 2027, you will retain the ability to save the full £20,000 in cash.
This exemption recognises that older savers, particularly those in retirement, may have a lower risk appetite and a shorter time horizon, making cash a potentially more suitable option.
It’s important to note that the £12,000 limit only applies to new contributions made from April 2027 onwards. Any money you have already saved in previous years will remain tax-free and will not count towards the new lower limit.
Until the changes take effect, you can continue to use the full £20,000 cash ISA allowance until 5 April 2027, covering the 2025/26 and 2026/27 tax years. This gives you a bit more time to maximise your cash savings under the current rules.
Why Is the Government Making These Changes?
The government has stated that the policy is designed to encourage an “investment culture” in the UK. By reducing the amount that can be held in cash, the aim is to encourage savers to invest in products that support UK companies and contribute to economic growth.
While cash savings provide security and accessibility, they typically offer lower long-term returns than investments. The government hopes that by creating this incentive, more people will build wealth through investing.
However, the change has proved controversial. Critics argue that it removes choice from savers and could push people into investment risk before they are ready.
Supporters counter that the change still allows substantial tax-free cash savings and that most people do not currently use their full allowance.
Additional Restrictions to Prevent Workarounds
The government knows that savers may try to circumvent the Cash ISA cap by holding cash within investment accounts. To prevent this, several new restrictions will apply from April 2027.
Firstly, new rules will prevent certain transfers from Stocks and Shares ISAs and Innovative Finance ISAs back into Cash ISAs for under-65s to ensure the £12,000 limit is effective.
Secondly, new tests will be introduced to determine whether an investment held within a Stocks and Shares ISA is genuinely an investment or is “cash-like”.
Finally, a charge will be levied on interest paid on cash balances held in Stocks and Shares or Innovative Finance ISAs. This effectively removes the tax incentive for parking large cash sums in investment wrappers to bypass the £12,000 cap.
How Could This Affect Your Savings Strategy?
If you currently save less than £12,000 per year into Cash ISAs, these changes are likely to not affect you directly. You can continue to save as you do now, with the same tax benefits.
However, if you regularly save more than £12,000 per year, or if you anticipate doing so in the future, you will need to consider how to use the remaining £8,000 of your ISA allowance.
One option is to open a Stocks and Shares ISA, but this requires accepting some level of investment risk.
Alternatively, if you prefer to keep your money in cash, you could explore other savings options outside the ISA wrapper. This might mean using your Personal Savings Allowance (PSA) more strategically or considering other tax-efficient structures.
For couples, there may be opportunities to maximise tax-free savings by using both partners’ allowances. Each person will still have a £12,000 Cash ISA allowance (or £20,000 if over 65), meaning a couple could save up to £24,000 in cash ISAs each year.
Understanding the Personal Savings Allowance
The Personal Savings Allowance (PSA) allows you to earn a certain amount of interest on savings held outside ISAs without paying tax. For basic-rate taxpayers, the PSA is £1,000 per year. For higher-rate taxpayers, it is £500. Additional-rate taxpayers do not benefit from a PSA.
If you are a basic-rate taxpayer and for example, the current savings rates are around 4.5%, you could hold approximately £22,000 in a standard savings account and stay within your PSA. Combined with the £12,000 Cash ISA allowance, this means you could have substantial tax-free cash savings.
From April 2027, tax on savings interest will increase by two percentage points across all tax bands. Basic-rate taxpayers will pay 22% instead of 20%, higher-rate taxpayers will pay 42% instead of 40%, and additional-rate taxpayers will pay 47% instead of 45%. This makes tax-efficient savings vehicles even more valuable.
Other ISA Options
In addition to Cash ISAs, there are other types of ISA that might suit your needs. The most famous is the Stocks & Shares ISA, which lets you invest in shares (e.g. companies listed on the London Stock Exchange) and generate tax-free capital gains and dividends.
An Innovative Finance ISA allows you to invest in peer-to-peer lending and other alternative finance arrangements. These can offer higher returns than cash but carry greater risk, including the risk of borrower default.
A Lifetime ISA is designed for first-time home buyers or retirement savings. You can save up to £4,000 per year and receive a 25% government bonus.
However, withdrawals for any other purpose incur a penalty. The government will consult on a potential replacement for the Lifetime ISA in early 2026.
Junior ISAs remain unchanged, with an annual allowance of £9,000 that will stay at this level until at least April 2031.
Make the Most of Your Remaining Cash ISA Allowances
With two full tax years remaining before the Cash ISA cap takes effect, there is still time to maximise your cash savings under the current rules.
If you have not yet used your £20,000 Cash ISA allowance for the 2025/26 tax year, consider doing so before 5 April 2026. You will then have another full year to save £20,000 in cash during 2026/27.
This could be particularly valuable if you are planning a major purchase, building up an emergency fund, or simply prefer the security of cash. Once the cap takes effect, you will not have the same opportunity to shelter large amounts from tax within an ISA.
Review Your Overall Savings and Investment Strategy
The Cash ISA changes provide a good opportunity to review your overall financial position and see if your savings could be working harder for you.
Consider whether you have the right balance between cash and investments, taking into account your age, risk tolerance, and financial goals. If you have been reluctant to invest in the past, the reduced Cash ISA limit may give the nudge you need to explore investment options.
It’s also worth reviewing your use of other tax-efficient savings and investment vehicles. For example, pensions offer generous tax relief and can work together with ISAs as part of a comprehensive financial plan.
Seek Professional Advice
Navigating the Cash ISA changes and deciding how to allocate your savings between cash and investments can be complex. Professional financial advice can help you understand your options and make informed decisions based on your individual circumstances.
An adviser can assess your risk tolerance, help you understand the potential returns and risks of different investment options, and create a strategy that aligns with your financial goals. They can also help to ensure that you are making the most of all available tax allowances and reliefs.
The Cash ISA changes represent a significant shift in UK savings policy. While the £12,000 cap may not affect everyone, understanding how it impacts your situation and planning accordingly can help you make the most of your tax-free allowances. By taking action now, you can ensure your savings strategy remains effective in the years ahead.
Please don’t hesitate to contact a member of the team if you would like to discuss your savings and investment strategy.
The content in this article was correct on 13/02/2026.
The value of your investment can go down as well as up and you may get back less than the amount invested
Innovative Finance ISA is a high risk investment do not invest unless you’re prepared to lose all the money you invest, you are unlikely to be protected if something goes wrong.
The Financial Conduct Authority does not regulate Tax Planning
You should not rely on this article to make important financial decisions. Teachers Financial Planning offers advice on savings, pensions, investments, mortgages, protection equity release and estate planning for teachers and non-teachers.
Please use the contact form below to arrange an informal chat with an advisor and see how we can help you.