Chancellor Rachel Reeves has announced a cut to the cash ISA allowance as part of wider efforts to unlock capital for UK growth.
The total ISA allowance will remain at £20,000, but from April 2027, only £12,000 can be held in cash, with the remaining £8,000 designated exclusively for investment. Meanwhile, savers aged over 65 will retain access to the full cash allowance.
Reeves said, in her second Budget, that the reform is part of a wider call for evidence on how the tax system can “better back entrepreneurs”, alongside a targeted review involving founders and investors. She said the ambition is to make the UK “an even more attractive place to grow your business.”
She said: “If you build here, Britain will back you, and our retail investment system should do the same.”
Reeves warned that the UK has “some of the lowest levels of retail investment in the G7,” which she said is “not only bad for businesses who need that investment to grow. It’s bad for savers too.”
Reeves pointed to the performance gap between cash and stocks and shares ISAs to highlight the benefits of long-term investment
She said: “Someone who has invested £1,000 a year in an average stocks and shares ISA every year since 1999 would be £50,000 better off today than if they’d put the same money into a cash ISA.”
Reeves added that recent changes to the financial advice and guidance rules will allow banks to play a more active role in directing customers.
She said: “Banks will be able to guide savers to better choices for their hard-earned money.”
She also confirmed that more than half of the ISA market, including Hargreaves Lansdown, HSBC, Lloyds, Vanguard and Barclays, has committed to launching new online hubs to help people invest in the UK.
Industry leaders welcome the cash ISA cut and back the full allowance for over-65s but warn it could add complexity and will need strong guidance to be effective.
Broadstone head of personal financial planning Rob Hillock says: “Cutting the cash ISA limit to £12,000 later this decade is a strong signal that the Chancellor wants more people investing rather than holding large amounts of cash. This would help potentially boost long-term returns for savers and will also enable the Government to channel more capital into UK equities and the wider economy.
“Protecting the full cash ISA allowance for over 65s is a smart move that will enable pensioners to de-risk as they enter retirement, recognising a greater need for more accessible and lower-risk savings, but further limits tax-efficient vehicles for those under 65 looking to save securely.”
Aegon pensions director Steven Cameron says: “The Chancellor has taken the unpopular decision to limit the amount which under-65s can pay into a cash ISA each year to £12,000 from April 2027. Time will tell if this blunt intervention will deliver on its intended purpose of turning those with more cash savings than they need in the short term into investors.
“We agree that many customers may not have the best balance between cash savings and stocks and shares investments. Those saving up to £20,000 each year into a cash ISA are losing out on the potential to benefit from the greater growth prospects of stocks and shares investments.
“But rather than the ‘stick’ of a new lower limit, we would have preferred more use of the ‘carrot’ of more guidance on savings versus investments.
“From next April, a new ‘Targeted Support’ service will be available, which could equip more people to make the right financial decisions for themselves. This includes understanding the benefits of moving excess cash into a stocks and shares ISA, potentially benefitting from much higher returns, albeit at the expense of the ‘no loss’ security of cash savings. This may be particularly appealing to those who are not prepared to pay for financial advice and is likely to be offered free of charge.
“Overall, the new rules around cash ISAs will also increase the complexity of ISAs and monitoring against limits. We need to examine the detailed rules, including any around whether individuals will still be able to transfer existing stocks and shares ISA funds into cash ISAs, circumventing the new limit.”
