Rachel Reeves announced a cut in the cash ISA limit for under 65s in her autumn budget, but there has been some confusion about how it will work.
Currently, people can newly save up to £20,000 annually in cash Isas, stocks and shares Isas, or a mix of both.
But the Government announced in the Budget that, from April 2027, the annual adult cash Isa limit will be slashed to £12,000.
Only over-65s will retain the full £20,000 annual cash Isa allowance.
The annual overall contribution limit into adult Isas will remain at £20,000, potentially encouraging some savers who reach the £12,000 cash Isa limit to put more money in stocks and shares.
LISA replaced? Cash ISA limit cut, savings tax increased...
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Does it affect my existing ISAs?
Rob Morgan, Chief Investment Analyst at Charles Stanley says: "No for Cash ISAs, but likely yes for Stocks & Shares ISAs.
"The new £12,000 Cash ISA restriction just applies to new money being allocated to ISAs by under 65s. We therefore expect existing Cash ISAs to be completely unaffected as anything already built up can remain. There is also the option, as there always has been, of transferring in part or full to a Stocks & Shares IS
"Investments built up in Stocks & Shares ISA may be affected in the following ways from April 2027 (depending on how the rules are devised):
- Holders of Stocks & Shares ISA holders may not be able to transfer these to Cash ISAs after this time if they are under 65
- Some lower risk investments may no longer be accessible
- Interest received on cash balances awaiting investment may be reduced by a government charge
He adds: "Regarding the Stocks & Shares points above there is much to be clarified and ironed out so it would be premature to make firm conclusions at this point – it’s a case of watch this space."
What will happen to Lifetime ISAs or Lisas?
Lifetime Isas have been criticised for withdrawal penalties that can swallow up some of the cash savers have put in if they try to take out money for anything other than their first home or their retirement.
The HMRC guidance suggested that the new product will have more flexibility for savers.
It said: “The Government will consult on introducing a new, first-time buyer only product that will provide the bonus when a person uses it to buy a house, removing the need for a withdrawal charge and giving savers flexibility in case their circumstances change.”
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Jason Hollands, managing director of online investment platform Bestinvest by Evelyn Partners, raised concerns that there were “unanswered questions” about how the reduced cash Isa limit would work in practice.
He pointed out that under current flexible rules, it is possible to transfer a stocks and shares Isa into a cash Isa and vice versa.
Mr Hollands previously said another issue to consider was whether cash savers with more than £12,000 to shelter may open a stocks and shares Isa with the excess and leave their money parked in cash.
Speaking on Friday, in light of the HMRC guidance, Mr Hollands said: “While it is no surprise they are going to take action – as we predicted this – levying a charge on cash held within stocks and shares Isas is yet another stealth tax that will impact genuine investors who sometimes decide to park money in cash for a period of time awaiting investment, or because they are nervous about the market environment.”
He said the tests to determine whether eligible investments are cash like “will throw doubt about access to money market funds within stocks and shares Isas and could even bring short-dated bonds into question”.
Mr Hollands also raised concerns that while “we will have to wait for more details” about how exactly the rules would work, if fees ended up being levied on stocks and shares Isa managers, based on their total client cash balances, this “would clearly require them to pass on this cost as an account fee”.
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