The UK savings landscape is poised for a notable shift, particularly for those under 65. From April 6, 2027, the annual Cash ISA allowance will see a substantial reduction, dropping from the current £20,000 to £12,000. This move, confirmed by HM Revenue and Customs, is designed to encourage greater retail investment, nudging savers away from pure cash holdings.
Simultaneously, a new 22% charge on interest earned from cash held within Stocks and Shares ISAs and Innovative Finance ISAs will be introduced, also effective from April 2027. This charge applies universally, irrespective of age or income tax bracket, even to non-taxpayers. The overall ISA limit, however, will remain at £20,000 for all individuals, with those aged 65 and over retaining their £20,000 Cash ISA allowance.
What's Changing and When
The changes are not immediate, but their implications for financial planning are already pressing. Here’s a breakdown:
- Cash ISA Allowance: From April 6, 2027, individuals under 65 will see their annual Cash ISA allowance cut to £12,000. For those 65 and over, the allowance remains £20,000. The total ISA allowance for all types remains £20,000.
- Tax on Cash in Investment ISAs: Also from April 2027, a 22% charge will be applied to interest earned on cash held within Stocks and Shares ISAs and Innovative Finance ISAs. This is a significant shift, intended to prevent the use of these investment wrappers for pure cash savings to circumvent the lower Cash ISA limit.
- Lifetime ISA (LISA) Replacement: The government is consulting on a new First-Time Buyer ISA to replace the LISA. This proposed ISA would offer a 25% government bonus paid only upon property purchase, with no exit penalties for non-property withdrawals. Crucially, there would be no maximum age limit for opening it, unlike the LISA. The consultation on this new product closes on August 17, 2026.
- Personal Savings Allowance (PSA): The PSA remains frozen for the 2026/2027 tax year. Basic rate taxpayers can earn up to £1,000 in savings interest tax-free, while higher rate taxpayers are limited to £500. Additional rate taxpayers receive no PSA.
- Starting Rate for Savings: Low earners with a total taxable income below £17,570 in 2026/27 may still benefit from a 0% tax rate on up to £5,000 of savings interest, in addition to their Personal Allowance and PSA.
The Current Climate: Rates and Inflation (June 2026)
As of June 18, 2026, the Bank of England's Monetary Policy Committee maintained the base rate at 3.75%. This figure influences the rates offered by banks and building societies.
Inflation, as measured by the Consumer Prices Index (CPI), stood at 2.8% in the 12 months to May 2026, unchanged from April. While this is above the Bank of England's 2% target, it indicates a degree of stability compared to recent volatility.
Currently, the best Cash ISA rates are approximately 4.75-4.76% AER, broadly comparable to the best easy-access savings accounts, which offer around 4.75-5.00% AER. This narrow gap means the tax-free status of an ISA is often the primary differentiator.
Scenario: Navigating Your Savings
Consider a basic rate taxpayer with £20,000 in savings earning 4.75% AER. This would generate £950 in interest annually. Under the current PSA of £1,000, this interest would be entirely tax-free. However, if that same individual had £25,000 earning the same rate, the interest would be £1,187.50. The £187.50 above their PSA would be subject to basic rate tax (20%), costing them £37.50.
For a higher rate taxpayer with £10,000 in savings at 4.75% AER, generating £475 in interest, this would fall within their £500 PSA and remain tax-free. But any interest above £500 would be taxed at 40%.
These scenarios highlight the immediate benefit of ISAs, where all interest is tax-free, regardless of the amount, up to the annual allowance. With the Cash ISA allowance for under 65s set to drop, maximising its use before April 2027, or considering other ISA types, becomes more pertinent.
But There Are Risks
The introduction of a 22% charge on cash in Stocks and Shares ISAs and Innovative Finance ISAs from April 2027 is a clear signal from HMRC. While designed to encourage investment, it means that simply parking cash in these wrappers to avoid the lower Cash ISA limit will incur a tax penalty. This could catch out individuals who use these accounts for short-term cash holdings or as a temporary measure between investments. It underscores the need to understand the specific purpose of each ISA type.
Furthermore, the proposed First-Time Buyer ISA, while promising, is still under consultation. Its final form and implementation date are not yet confirmed, meaning those relying on the LISA for a house deposit should continue to monitor developments closely.
What this means for you
Given the impending changes, it is prudent to review your current savings strategy. If you are under 65 and primarily use Cash ISAs, consider maximising your £20,000 allowance before April 2027. For those holding significant cash within Stocks and Shares or Innovative Finance ISAs, be aware of the 22% interest charge coming in 2027 and adjust your strategy accordingly, perhaps by moving excess cash into a dedicated Cash ISA or a standard savings account if you are within your PSA.
Step-by-step what to do right now
- Review Your Savings: Understand how much you have in Cash ISAs, Stocks and Shares ISAs, and standard savings accounts.
- Assess Your Tax Position: Determine if you are a basic, higher, or additional rate taxpayer to understand your Personal Savings Allowance.
- Maximise Current Allowances: If you are under 65, consider utilising your full £20,000 Cash ISA allowance for the current tax year and the next, before it reduces.
- Understand the 22% Charge: If you hold cash in Stocks and Shares or Innovative Finance ISAs, plan for the 22% interest charge from April 2027. This may mean moving cash into a Cash ISA or a standard savings account if it's within your PSA.
- Stay Informed on LISA Replacement: If you are a first-time buyer, follow the developments regarding the new First-Time Buyer ISA. The consultation closes on August 17, 2026.
When Effective
The key changes to the Cash ISA allowance and the 22% charge on cash in investment ISAs are effective from April 6, 2027. The consultation on the new First-Time Buyer ISA closes on August 17, 2026, with further announcements expected thereafter.
Where to get help
For personalised advice on your financial situation, consider speaking with an independent financial adviser. Information on tax rules can also be found on the official HMRC website.
Sources
- HM Revenue and Customs (HMRC) — Autumn Budget 2025 announcements on ISA changes
- Bank of England — June 2026 Monetary Policy Summary and Minutes
- Office for National Statistics (ONS) — May 2026 Consumer Prices Index (CPI) data
- Government consultation document — First-Time Buyer ISA proposals
This is not financial advice. Seek independent financial guidance. Interest on standard accounts may be subject to tax above your Personal Savings Allowance.