The amount you can save in a tax-free cash ISA has been slashed from £20,000 to £12,000 in the budget.
The cut will come into effect from April 2027, but it will not affect over-65s, who will be allowed to stick to the £20,000 limit.
Chancellor Rachel Reeves hopes the cut will get savers investing and help boost the economy, but experts have warned it could have a detrimental effect and put people off saving completely.
Follow the latest in our Money blog
In the lead-up to the budget, banks, building societies and campaigners warned it could force people to pay more tax.
So, will it? Here we explain what a cash ISA is, what’s changed and what impact it could have on your savings.
What is a cash ISA?
It’s a tax-free savings account, meaning you don’t have to pay tax at all on any interest you earn. Before today you could deposit up to £20,000, but Reeves has cut this to £12,000.
Some cash ISAs are instant access, while others require you to lock money in for a certain period of time to get higher interest rates.
What does this mean for savings?
It’s important to stress that the full ISA limit – the amount you can deposit across three types of tax-free ISA accounts (cash, innovative finance, and stocks and shares) – is staying at £20,000.
But if neither of the other ISA options appeal (you may be a more cautious saver who doesn’t want to put money in stocks that can go up and down), you’ll have to look for another savings account once you get to £12,000. Bonds would be one option – but these aren’t tax-free.
The amount you could have to pay depends on your personal savings allowance.
Basic rate taxpayers are allowed to earn £1,000 in interest before paying income tax at 20%.
Higher-rate taxpayers can earn £500 in interest before paying tax.
Tax benefits aside, the change will mean you’ll earn less interest in a cash ISA.
Here’s an example…
You have £20,000 in savings, and you are happy to lock it away for a year.
Under the old cap, you would be able to place all of that money into a one-year cash ISA.
The highest interest rate on offer is 4.28%, according to The Private Office, meaning you would earn £856 of tax-free interest.
But under today’s changes, you can only add up to £12,000 into it, meaning the interest earned drops to £513.60.
Let’s say you put your remaining £8,000 into the top-paying one-year bond, which is offering 4.5%, rather than an innovative finance or stocks and shares ISA.
On the face of it, you might think it’s a higher rate, so you’ll get a better return – but take into account the tax you would have to pay and that interest rate drops to 3.6%, giving you a £288 return.
Read more:
Budget 2025: The key points at a glance
Add those together, and your interest has dropped by £55 to £801.60.
For a higher-rate taxpayer in the same situation, the change is more drastic.
They would still earn the £513.60 in their cash ISA, but the interest rate on their one-year bond would effectively drop to 2.7% after the tax deduction, giving them £216 in interest.
In total, across both accounts, they would have earned £729.60, instead of £856.
“It’s not just people with loads of money that this will affect. A basic rate taxpayer will breach the personal savings allowance with just £22,223 in the top one-year bond paying 4.5%,” Anna Bowes, saving expert at The Private Office, said.
What is Reeves trying to do?
Reeves is hoping that lowering the cap will push people to put their savings into a stocks and shares ISA instead, but cash ISAs are significantly more popular.
Around 14.4 million people have a cash ISA, according to figures from AJ Bell, while 4.2million hold a stocks and shares ISA.
Before the budget Tom Selby, director of public policy at AJ Bell, warned: “Tinkering with the cash ISA allowance would be an ineffective way to promote investing, with more than half of Brits saying that, if faced with a cash ISA cut, they would simply move their money to a different savings account.
“It would also add significant further complexity to the system when Labour said before the general election they were committed to simplification.”
Banks and building societies, which use money in cash ISAs to lend to customers, warned the cut could cause mortgage rates to rise.
The important things to remember
One of the real risks of the cut is the psychological impact it will have on savers, with several experts warning that people may withdraw their cash even if it’s nowhere near the £12,000 simply through lack of understanding.
“On one hand, slashing the cash ISA allowance from £20,000 to £12,000 will not have a dramatic effect on most people,” Adam French, head of news at Moneyfacts, said.
“The average amount saved into a cash ISA in the 2023/24 tax year was just under £7,000 per person. However, cultural and behavioural barriers to investing run much deeper than the limit on what can be saved into a cash ISA.”
Selby warned that it could create a “scarcity mindset”, resulting in savers taking a “use it or lose it approach” towards contributions.
The plus side is the new limit is unlikely to affect money already stashed away in your cash ISA.
MoneySavingExpert Martin Lewis said the limits usually only applied to new money being put in – but we should get more confirmation of this in due course.
