Chancellor John Healey has scrapped plans to reduce the annual Cash ISA allowance to £12,000, meaning savers can continue to put up to £20,000 a year into a Cash ISA tax-free.
The decision reverses reforms announced by former Chancellor Rachel Reeves, which would have reduced the amount people aged under 65 could save in a Cash ISA from April 6, 2027. Under the original proposals, savers aged 65 and over would have retained the full £20,000 allowance, while younger savers would have been restricted to £12,000. The overall annual ISA allowance would have remained at £20,000.
Reversal follows concerns over saving and mortgage costs
The Chancellor's decision means the existing Cash ISA limit will be retained for savers of all ages, following concerns that the changes would discourage saving and potentially increase mortgage costs. ISAs allow people to save or invest money without paying Income Tax on interest or Capital Gains Tax on investment returns.
The reversal has been welcomed by financial experts, with Tom Selby, director of public policy at AJ Bell, describing the original proposals as overly complicated. He said: "Rachel Reeves' ISA reforms were a car crash, lamented by most of the retail investment industry, who criticised the complexity they would add for little consumer benefit, and building societies, who warned they would increase mortgage costs."
Mr Selby added: "Healey deserves credit for seeing this iceberg coming and taking abortive action at the earliest opportunity." He also called for the Government to abandon associated restrictions, including plans to tax interest earned on cash held in Stocks and Shares ISAs and prevent transfers from those accounts into Cash ISAs.
Industry welcomes protection for savers
Maike Currie, vice president of personal finance at PensionBee, said the decision would protect people who preferred to keep their money in savings rather than investments. She said: "Saving was never the problem – the challenge is giving people the confidence to take the next step into investing. Restricting Cash ISAs risked penalising the very people who need the most help building long-term wealth – you don't persuade people to eat more meat by rationing their vegetables."
Holly Mackay, chief executive of Boring Money, also welcomed the reversal, arguing that restricting access to cash savings would not necessarily encourage more people to invest. She said: "Fear of loss is the main deterrent to investing and we will not fix this by restricting access to cash."
The decision could also benefit the mortgage market, with building societies having previously raised concerns about the potential impact of reducing Cash ISA deposits. Jazz Gakhal, chief executive officer of money at Skipton Building Society, said: "Cash ISAs play an important role in helping people build financial security, while also providing vital funding for mortgage lending, including to first-time buyers."
Impact on ISA savers and new Starter ISA
Andrew Prosser, head of investments at InvestEngine, said retaining the allowance would benefit 2.6 million ISA savers who would otherwise have been affected by the reduction. He also welcomed the Chancellor's announcement of a new Starter ISA aimed at encouraging people to invest in a Stocks and Shares ISA for the first time. Mr Prosser said: "The biggest barrier for many first-time investors is confidence rather than access."
The Chancellor's reversal means people will continue to be able to save up to £20,000 into Cash ISAs each tax year without paying tax on the interest earned. Savers can also divide their £20,000 annual allowance between different types of ISAs, including Cash ISAs and Stocks and Shares ISAs, provided they remain within the overall limit.
The allowance applies to money paid into ISAs during each tax year, which runs from April 6 to April 5. Savings already held in an ISA do not count towards the following year's allowance. Cash ISAs are generally suited to people who want to protect their savings from investment market fluctuations, particularly when building an emergency fund or putting money aside for shorter-term expenses. Stocks and Shares ISAs offer the potential for higher returns over longer periods, although investments can fall in value and returns are not guaranteed. Savers can find further information about the different types of accounts and tax-free allowances on the GOV.UK ISA guidance pages.
