Cash ISA limit cut to £12,000 in bid to boost UK stock market

Chancellor Rachel Reeves. Photo: Leon Neal/Getty Images.

At her Autumn Budget, Chancellor Rachel Reeves announced a future cut to the annual cash individual savings account (ISA) allowance to £12,000 for those under the age of 65, but retained the overall limit at £20,000, in a widely trailed move. The change will take effect from 6 April 2027.

The move will mean that, in future tax years, in order to use your full annual ISA allowance, you must funnel at least £8,000 into either the stocks and shares or innovative finance versions. The returns made or interest earned within ISAs will continue to be tax-free.

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For the current tax year and the next tax year (from 6 April 2026), savers can still plough the full £20,000 into cash ISAs.

Annual subscription limits will remain at £20,000 for ISAs, £4,000 for Lifetime ISAs and £9,000 for Junior ISAs and Child Trust Funds until 5 April 2031.

Today’s announcement concludes months of speculation over whether the cash ISA allowance would be scaled back to encourage more flows into the stock market in a bid to improve savers’ returns and boost domestic companies.

At her Mansion House speech in July, the chancellor was expected to reduce the limit to £4,000 but backed away from the idea amid fierce resistance from building societies. The £12,000 figure announced today appears to be an attempt to appease parties who are for and against a smaller cash ISA limit.

The Budget document following Reeves’ speech stated that the move to reduce the cash ISA limit is “part of a wider strategy to develop a retail investment culture”.

The document added: “This will drive better returns for savers and incentivise investment.”

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From when ISAs were launched in 1999 – replacing personal equity plans (PEPs) and tax-efficient special savings accounts (TESSAs) – until 2014, the cash limit was lower than the overall allowance, so this doesn’t represent new territory.

However, there are concerns about whether restricting yearly flows into cash ISAs will fulfil the government’s aim to stimulate the UK stock market. Critics argue that savers with the financial resources to put more than £12,000 into ISAs during the tax year may swerve investing and beef up taxable savings accounts instead.

Time will tell whether the policy has the desired effect, particularly when a basic-rate taxpayer can earn roughly £25,000 on a savings account paying 4% interest without paying a penny in tax under the personal savings allowance. We must note that this allowance halves to £500 for higher-rate taxpayers, while those in the 45% additional-rate band, applied on earnings above £125,140, don’t get a savings allowance.

The move also raises questions about the future of ISA transfers. At present, you can switch freely between the cash and stocks and shares types, which is an effective way to shift money within the tax wrapper to match changing financial goals while retaining its tax-free status.

But before the cash and stocks and shares ISA limits where equalised 11 years ago, transfers from the latter to the former were prohibited to prevent people from circumventing the rules. Otherwise, you could’ve pumped the lot into the shares version and immediately switched to a cash ISA.

I’m yet to examine the details in the chancellor’s red book, but presumably these restrictions will return.

Allure of cash-like alternatives

For those who wish to fill up their annual ISA allowance but crave greater security and certainty than stock markets offer and are happy to forgo the prospect of higher returns, there are alternative options, such as money market funds. These can be held within a stocks and shares ISA.

With money market funds, you trust a professional fund manager to generate a cash-like return on your behalf. The popularity of these funds has rocketed in recent times, especially as returns have outpaced inflation.

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The sticking point here is the lack of awareness about such strategies, something that may change over time in light of the forthcoming reduction to the cash ISA limit.

Further ISA reform on the cards

While there was no mention of it in Reeves’ speech, there are changes afoot for the Lifetime ISA. Details were thin on the ground, but in the Budget document it said that there will be reform to this ISA and a new product offered in place of it.

It said: “The government will publish a consultation 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.”

There have been lots of concerns raised about whether this product is still fit for purpose.

One problem for those looking to use a Lifetime ISA to buy their first home is that the maximum property value that you can buy is £450,000. This figure has been fixed since the Lifetime ISA was launched in 2017 and is particularly problematic for those who live in London or the South East.

The second problem with the Lifetime ISA is the early withdrawal penalty, which is 25% of the amount taken out if you don’t use the product to buy your first home or you’re under age 60. Many had hoped this would be reduced to 20% to prevent savers being worse off should they wish to buy a property above £450,000, or if they need to access the funds in an emergency.

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Finally, there was no mention of ISA simplification, something many firms, including interactive investor, have urged the government to consider to make it easier for savers and investors to choose the right assets for their specific financial goals.

However, one other ISA rumour doing the rounds ahead of today’s speech didn’t come to fruition. One report suggested the chancellor was considering sectioning off a portion of the stocks and shares ISA solely to invest in the UK stock market. However, there was no mention of this idea during the speech or in the small print after.

Prior to this, the government was rumoured to be seriously looking into a potential British ISA. This was proposed by the previous Conservative government, which suggested that there would be a separate ISA just for investing in the UK market, the so-called British ISA. The idea here was that it would be £5,000 on top of the existing £20,000 allowance. However, Labour scrapped plans for this controversial product shortly after winning power.