Savers over the age of 65 will continue to be able to save up to £20,000 in a cash Isa each year.
The annual adult cash Isa subscription limit will be slashed to £12,000 from April 2027, in what one building society described as a “sucker punch” to savers.
In the Budget, the Government unveiled plans to reform the Isa system so that only over-65s will retain the full £20,000 annual cash Isa allowance.
The annual overall contribution limit into adult Isas will remain at £20,000, potentially encouraging some savers who reach the £12,000 cash Isa limit to put more money in stocks and shares.
A consultation will also be published in early 2026 on the implementation of a “new, simpler” Isa product to support first-time buyers to buy a home. Once available, this new product will be offered in place of the Lifetime Isa.
Financial services firms will be providing new easily navigable ways for people to find the right UK investment for them, the Government said.
Harriet Guevera, chief saving officer at Nottingham Building Society, said: “The decision to slash the annual cash Isa allowance from April 2027 is a sucker punch for savers and deeply disappointing for lenders.
“We support the Government’s aim to boost an investing culture in the UK, but restricting choice is not the way to do it.”
Tom Selby, director of public policy at AJ Bell, said: “There is scant evidence the proposal to cut the cash Isa allowance from £20,000 to £12,000 will do anything to encourage retail investing. Instead, there is a real risk that the April 2027 deadline will drive more people to cash Isas in the short-term.
“The decision to exempt over-65s from the cash Isa cut is frankly bizarre given pensioners will in the main be prioritising taking an income from their funds rather than piling in £20,000 a year.
“All of this adds up to massive extra complexity and friction in the Isa system.”
Alex Sitaras, head of savings and partnership products at Skipton Building Society, said: “What we’re hearing already is a mix of frustration, confusion and, for some, real concern about making the wrong move.”
He added: “People shouldn’t feel pushed into investing simply because the cash Isa cap is falling. Stocks and shares Isas can be a brilliant way to grow wealth tax-efficiently, but only when they genuinely support someone’s long-term goals.”
The Government also said it would increase the tax rate on savings income by two percentage points across all bands from April 2027, although it said taxpayers will continue to benefit from the protection offered by Isas. Interest and dividends received on assets held within Isas will continue to be tax-free.
Sarah Coles, head of personal finance, Hargreaves Lansdown, said: “The personal savings allowance will still protect the first £1,000 of savings interest for basic rate taxpayers and £500 of interest for higher rate taxpayer, but after that people will face a hike in their tax bill.
“It’s going to be more important than ever to take advantage of cash Isas, where all your savings are protected from tax. The change to the cash Isa allowance will not happen overnight so there is still an opportunity to take advantage of your allowance this year.”
James Norton, head of retirement and investments at Vanguard Europe, said: “Cash savings remain an important part of a sound financial plan. Research recommends holding £2,000 along with three months’ worth of expenses in cash, to cover emergencies.”
But he said investing “gives you the best chance of achieving long-term financial goals”.
The value of investments can go down as well as up.
James Guthrie, EY Financial Services tax partner, said: “Demand for cash Isas has been rising, as more risk-averse savers and those with short-term plans for their savings, for example for property, often see them as a safe home for their money.
“These individuals may not want to switch a sizeable portion of their funds into stock market shares. Ultimately, this move could result in people saving less.
“Equally, for banks who leverage cash Isas as funds for household and business loans, this decision could create challenges, potentially leading to higher interest rates, stricter lending criteria and reduced access to capital for firms.”
Les Cameron, head of technical at M&G, said: “There is work to do to educate people about the risk and reward of both saving and investing.
“Ultimately, cash isn’t risk free and investing isn’t risk free, so people need to understand the risks and decide which ones they are willing and able to take.
“We suspect attitudes towards investing is the key driver on whether they leave cash or not, not how tax efficient their cash savings are. The changes do add a little complexity to a system where simplification would be welcome.”
Catherine Wray, senior savings manager at Leeds Building Society, said: “Protecting a £20,000 annual tax-free cash Isa allowance for older savers with a lower appetite for risk will provide reassurance to millions who rely on those cash savings.
“Whilst we accept that investing in stocks and shares is the right choice for some people, it’s not suitable for everyone. Reducing the cash Isa allowance for under-65s risks limiting options for those who need certainty and flexibility for shorter-term goals, such as saving for a house deposit.
“There is still plenty of time for savers to maximise their current allowance before the changes are implemented in 2027, and existing balances will be unaffected by all reforms.”
