How Does the UK Budget 2025 Affect ISAs?
The Autumn Budget 2025 delivered by Chancellor Rachel Reeves on 26th November introduced significant changes to Individual Savings Accounts that will reshape how UK savers can use their tax-free allowances. The measures aim to encourage more people to invest rather than hold large amounts in cash, though the changes have sparked mixed reactions from savers and financial experts alike.
The Main Change: Cash ISA Limit Reduced to £12,000
From 6th April 2027, the amount you can save into cash ISAs will drop from £20,000 to £12,000 per tax year for most savers. The overall ISA allowance remains at £20,000, but the government has designated £8,000 of this specifically for investments in stocks and shares.
In practice, this means that if you're under 65 and want to use your full £20,000 ISA allowance, you'll need to split it between different types of ISAs. For example, you might save £12,000 in a cash ISA and £8,000 in a stocks and shares ISA, or £12,000 in cash, £4,000 in a Lifetime ISA, and £4,000 in a stocks and shares ISA.
Who is exempt? Anyone aged 65 or over retains the full £20,000 cash ISA allowance. This age-related exemption addresses concerns that older savers approaching or in retirement should maintain access to lower-risk cash savings without being pushed into riskier investments.
The Investment Requirement Explained
The government has framed this change as reserving £8,000 of the annual allowance "exclusively for investment". This doesn't mean you must invest £8,000, but if you want to shelter more than £12,000 from tax in any given year, at least some of that additional amount needs to go into a stocks and shares ISA or other investment vehicle.
Current ISA allowances until April 2027:
| ISA Type | Annual Limit | Notes |
|---|---|---|
| Cash ISA | £20,000 | Can use full allowance in cash |
| Stocks & Shares ISA | £20,000 | Can use full allowance in investments |
| Lifetime ISA | £4,000 | Counts towards overall £20,000 limit |
| Innovative Finance ISA | £20,000 | Can use full allowance |
| Overall limit | £20,000 | Across all ISA types combined |
New ISA allowances from April 2027 (under 65s):
| ISA Type | Annual Limit | Notes |
|---|---|---|
| Cash ISA | £12,000 | Maximum in cash only |
| Stocks & Shares ISA | £20,000 | Remaining £8,000 must be invested |
| Lifetime ISA | £4,000 | Counts towards overall £20,000 limit |
| Innovative Finance ISA | £20,000 | Counts as investment towards £8,000 |
| Overall limit | £20,000 | At least £8,000 must be invested |
Impact on Different Types of Savers
The practical effect of these changes varies considerably depending on how much you typically save each year. Many savers won't feel the immediate impact, as saving £1,000 per month (£12,000 annually) is beyond the reach of many households. However, the change becomes significant for those who:
- Receive windfalls from inheritance, property sales, or redundancy
- Are high earners who regularly max out their ISA allowances
- Have built up substantial savings outside ISAs and want to transfer them gradually
- Use cash ISAs strategically for short-term savings goals
Research conducted before the Budget found that around 40% of some providers' customers were depositing more than £12,000 into cash ISAs annually, suggesting a sizeable minority will need to adjust their savings strategies.
Lifetime ISA Changes on the Horizon
The Budget also confirmed that the government will consult on replacing the Lifetime ISA with a new, simpler product designed specifically for first-time buyers. The consultation is expected in early 2026, and once the new product launches, it will be offered in place of the existing Lifetime ISA.
Current Lifetime ISA holders will see their accounts remain unchanged for now, with the £4,000 annual contribution limit and 25% government bonus continuing. The government has indicated it will consider increasing the current £450,000 property price cap, which has remained frozen since the LISA launched in 2017 despite substantial house price growth in many areas.
The Lifetime ISA has faced criticism for several years due to its complexity and the harsh 25% penalty for withdrawals outside of the permitted circumstances (buying a first home under £450,000 or retirement after age 60). In the 2024/25 tax year alone, savers incurred approximately £102 million in withdrawal penalties.
Related Tax Changes Affecting Savers
The Budget introduced several other tax changes that affect how your savings and investments are taxed outside of ISAs:
Dividend tax increases (from April 2026):
- Basic rate: rising from 8.75% to 10.75%
- Higher rate: rising from 33.75% to 35.75%
- Additional rate: no change
Property income tax increases (from April 2027):
- Basic rate: rising from 20% to 22%
- Higher rate: rising from 40% to 42%
- Additional rate: rising from 45% to 47%
These increases make the tax-free benefits of ISAs even more valuable for those affected. The Personal Savings Allowance (£1,000 for basic-rate taxpayers, £500 for higher-rate taxpayers) remains unchanged, as does the £1,000 property income allowance.
What Should You Consider Doing?
The changes don't take effect until April 2027, giving you time to review your savings strategy. Some questions to consider:
If you regularly save more than £12,000 per year:
- Are you comfortable with the risks associated with investing in stocks and shares?
- Could you benefit from splitting your savings between cash and investment ISAs before the deadline?
- Would diversifying into investments actually suit your long-term financial goals?
If you're approaching age 65:
- You'll retain the full £20,000 cash ISA allowance once you reach 65
- Consider whether it makes sense to prioritise cash savings until you reach the exemption age
If you have a Lifetime ISA:
- The consultation may bring positive changes, including an increased property price cap
- The £4,000 annual limit for Lifetime ISAs remains unchanged until April 2031
If you're risk-averse but need to invest £8,000:
- Some stocks and shares ISA providers offer interest on uninvested cash within the ISA wrapper
- Money market funds provide lower-risk options compared to direct equity investment
- Consider consulting with a financial adviser about suitable investment options
Making the Most of Your ISA Allowances
Understanding how ISAs work becomes more important with these changes. ISAs remain one of the most valuable tax-efficient savings tools available to UK residents, protecting your money from both income tax and capital gains tax.
The key is matching your ISA strategy to your circumstances. Cash ISAs suit those who need certainty, quick access, or are saving for short-term goals. Stocks and shares ISAs typically offer better long-term growth potential but require accepting that values can fluctuate and you might get back less than you invest. Financial experts generally recommend investing for at least five years to ride out market volatility.
For many people, using a combination of cash and investment ISAs already makes sense from a portfolio diversification perspective. The Budget changes simply formalise this approach for those wanting to maximise their tax-free allowances.
Your Questions Answered
Q: Can I still open multiple ISAs in the same tax year? Yes, ISA rules changed in April 2024 to allow opening multiple ISAs of the same type in one tax year, as long as you stay within the £20,000 overall limit.
Q: What happens to my existing cash ISA savings? All ISA savings you've already accumulated remain fully protected with their tax-free status. The changes only affect new contributions from April 2027 onwards.
Q: Do Junior ISAs or Innovative Finance ISAs have separate limits? Junior ISAs have a separate £9,000 annual allowance and aren't affected by these changes. Innovative Finance ISAs count as investment ISAs under the new rules.
Q: What if I turn 65 during the 2027/28 tax year? Once you reach age 65, you become eligible for the full £20,000 cash ISA allowance, even mid-tax year.
Q: Can I transfer money from a stocks and shares ISA to a cash ISA? Yes, ISA transfers are permitted in both directions, though you should check with providers about any restrictions or fees.
Planning for April 2027
With more than a year until the changes take effect, you have time to adapt your savings strategy without rushing into decisions. The government's stated aim is to encourage a culture of long-term investing in the UK, bringing retail investment levels closer to other G7 countries.
Whether this approach will achieve its goal remains to be seen. Critics argue that reducing cash ISA limits won't necessarily convert cash savers into investors, while supporters believe it provides a useful nudge towards potentially better long-term returns. As one financial expert noted, many people already invest through their workplace pensions without realising it, suggesting the psychological barrier to investing may be more about familiarity than fundamental opposition.
The consultation on Lifetime ISA reform may also provide opportunities to simplify the overall ISA landscape, potentially making it easier for people to understand their options and make informed decisions about how to save for their futures. Until then, the current rules remain in place, and you can continue using your full £20,000 allowance as you see fit.
