Chancellor Wields the Axe on Tax-Free Savings
In a dramatic move aimed at stimulating economic activity, Chancellor Rachel Reeves has announced a significant reduction in the annual Cash ISA allowance. Delivered as part of the Wednesday 26 November 2025 budget, the change will see the tax-free savings limit for cash cut from £20,000 to £12,000.
The new, lower limit is scheduled to come into effect from April 2027. However, in a notable generational split, the reduction will not apply to savers aged 65 and over, who will retain the right to save up to the full £20,000 in a Cash ISA each year.
What This Means for Your Wallet
The government's stated objective is to encourage more people to move their money out of cash savings and into investments, such as Stocks and Shares ISAs, which are seen as a greater driver of economic growth. The core logic is that by restricting the most popular, low-risk savings vehicle, savers will be pushed towards potentially higher-return assets.
It is crucial to understand that the overall ISA allowance of £20,000 remains unchanged. This is the total you can still save across Cash, Innovative Finance, and Stocks and Shares ISAs combined. The cut specifically targets the portion that can be placed in the cash component.
For cautious savers who prefer the security of cash over the volatility of stocks, this change presents a challenge. Once you have deposited £12,000 into a Cash ISA, any additional savings will need to go into a standard, taxable savings account or a bonds product.
The Real-World Financial Impact
The immediate consequence is a potential reduction in the tax-free interest you can earn. Let's consider a practical example provided by savings experts at The Private Office.
Imagine you have £20,000 to save for one year. Under the old rules, you could place the entire sum in a top-paying cash ISA at 4.28%, earning £856 in tax-free interest.
After the change, only £12,000 can go into the cash ISA, generating about £513.60 in interest. The remaining £8,000 would likely go into a taxable bond. For a basic-rate taxpayer, the effective interest rate on that portion drops after tax, yielding around £288. Your total return would fall to approximately £801.60—a loss of over £55.
The effect is more pronounced for higher-rate taxpayers, who could see their total interest on the same £20,000 drop from £856 to around £729.60.
Expert Warnings and Industry Backlash
Financial experts and industry bodies have reacted with concern. Tom Selby, director of public policy at AJ Bell, warned before the budget that such a move would be an "ineffective way to promote investing". He cited research indicating that over half of Britons would simply move their money to a standard savings account rather than invest it.
There is also a fear of a "scarcity mindset" developing, where savers rush to use their allowance for fear of losing it, even if they don't have the full £12,000 to save.
Furthermore, banks and building societies, which rely on cash ISA deposits to fund mortgages, have cautioned that the policy could ultimately lead to higher mortgage rates for borrowers.
Key Takeaways for Savers
Despite the significant headlines, it's important to maintain perspective. As Adam French from Moneyfacts pointed out, the average amount saved in a cash ISA in the 2023/24 tax year was just under £7,000, which is below the new £12,000 limit.
Additionally, money-saving expert Martin Lewis has indicated that the new limit is expected to apply only to new money deposited from April 2027, not to funds already held within existing Cash ISAs.
For now, savers should continue to utilise their full allowances and stay informed as more detailed guidance from the Treasury is released in the coming months.
