The Chancellor’s Autumn Budget introduced a series of changes that will have a direct impact on savers across the UK. Several tax rates, covering savings income, dividends and property, are rising, while income tax thresholds, including the personal savings allowance, will remain frozen. In addition, most savers will face a reduction in the annual cash ISA limit from 2027.
According to the government, these measures are intended to encourage people to move away from holding large amounts of cash and instead invest more of their savings.
Increases to Savings Tax Rates
From 2027, the income tax rates applied to savings income will rise:
- Basic rate savings tax will increase from 20% to 22%
- Savings higher rate will rise to 42%
- Savings additional rate will increase to 47%
Despite these increases, the current allowances remain unchanged. The starting rate for savings, which allows individuals with taxable income under £17,570 to earn up to £5,000 of savings income tax-free, will continue at this level until 2031.
Cash ISA Limits to Be Reduced
Significant changes to cash ISA limits are also on the way.
From 2027, the annual amount you can contribute to a cash ISA will fall to £12,000, within the unchanged overall ISA limit of £20,000.
However, savers aged 65 or over will be exempt from this change. They will continue to have access to the full £20,000 cash ISA allowance.
The government states that scaling back the cash ISA limit for younger savers should encourage greater investment into the markets. While this may lead to improved long-term returns for many, some savers, especially those preparing for a house purchase within the next few years, may find the change disadvantageous if they prefer the security of cash.
It is worth noting that cash ISA and stocks & shares ISA limits were equalised only in 2014. For much of the period since then, cash interest rates have been historically low, meaning that ISAs offered limited additional benefit. The return to a split in allowances reflects a move back towards the pre-2014 approach rather than an entirely new policy direction.
Future of the Lifetime ISA
Lifetime ISAs (LISAs) and Junior ISAs will keep their current limits, £4,000 for LISAs and £9,000 for Junior ISAs, until April 2031.
However, the government plans to consult next year on introducing a new simplified ISA, designed specifically to support first-time buyers and intended to replace the Lifetime ISA.
What Impact Will These Measures Have?
The Office for Budget Responsibility (OBR) forecasts that household saving, excluding pensions, will peak at 6.5% of income this year, before falling to 2.25% by 2030.
The government hopes that by reducing the incentives to hold cash, more households will choose to invest or spend their money, providing a boost to economic growth.
What Actions Can You Take?
While these changes may feel restrictive, there are still opportunities to make the most of existing tax-efficient allowances.
1. Maximise This Year’s Allowances
The current £20,000 cash ISA limit remains available until the end of the next tax year. If you are over 65, this allowance will continue even after 2027.
2. Split Your ISA Contributions
Under the revised system, you will still be able to place £12,000 into a cash ISA and allocate the remaining £8,000 into a stocks & shares ISA.
For couples, this offers £24,000 of tax-free cash savings annually.
3. Utilise Multiple ISA Types (Under Age 40)
If you are under 40, you can save:
- £12,000 in a cash ISA
- £4,000 in a Lifetime ISA
- £4,000 in a stocks & shares ISA
This still allows you to reach the full £20,000 ISA limit.
4. Make Use of the Personal Savings Allowance
Basic rate taxpayers can earn £1,000 of interest tax-free each year outside an ISA.
With top instant access rates currently around 4.5%, holding £22,000 in such an account would generate approximately £990 of interest, falling entirely within the allowance for most basic rate taxpayers.
Increase to FSCS Protection Limit
Separate from the Budget, the Prudential Regulation Authority has confirmed that the FSCS deposit protection limit will rise on 1 December 2025 from £85,000 to £120,000 per person, per banking group. This provides greater security for savers with larger cash balances.
Frequently Asked Questions (FAQs)
1. When do the new ISA limits come into effect?
The reduced £12,000 cash ISA limit is planned to take effect in April 2027, while the overall ISA limit will remain at £20,000.
2. Will the new cash ISA limit affect older savers?
No. Savers aged 65 or over will continue to have the full £20,000 cash ISA allowance.
3. Are stocks & shares ISA limits changing?
No. You will still be able to invest £20,000 per year across ISA products, though only £12,000 of this will be permitted in cash
(except for over-65s).
4. Is the Lifetime ISA being scrapped?
Not immediately. LISAs will remain available with their current £4,000 limit until 2031, but the government is consulting on a potential replacement designed to assist first-time buyers.
5. Should I move money from cash into investments?
This depends on your risk tolerance, time horizon, and financial goals. The government’s aim is to encourage increased investment, but cash savings remain important for emergency funds and short-term goals like home deposits.
6. How does the FSCS change help me?
From December 2025, your savings will be protected up to £120,000 per banking group, offering greater security if you hold large cash balances.
7. Do higher savings tax rates apply to everyone?
No. They apply depending on your income tax band from 2027:
- 22% for basic rate
- 42% for higher rate
- 47% for additional rate
