Budget 2025 - Lower Cash ISA subscription limit for under 65s set to disrupt savings plans – but there are alternatives

  
- Chancellor Rachel Reeves cuts the annual cap on tax-free savings into a Cash ISA to £12,000 for under 65s 
- Overall, ISA allowance remains at £20,000 
- Reforms coming in April 2027 with £8,000 of the existing ISA allowance set to be earmarked for investment at that point 
                                         
Alice Haine, Personal Finance Analyst at Bestinvest by Evelyn Partners, the online investment platform, comments:    
           
“After months of speculation, the decision to reduce the Cash ISA subscription cap to £12,000 from April 2027 may not be as severe as initially feared – with rumours, at one stage, suggesting a more drastic cut of just £4,000. However, the policy change to limit the cap to £12,000 for under 65s will still disrupt the plans of more affluent savers that rely on the tax benefits a Cash ISA provides, as savers have also been hit with increases in tax rates on dividends and savings. While the rate of Dividend Tax for basic and higher rate taxpayers will rise by 2 percentage points next April, savings income tax will be increased by 2 percentage points across the board from April 2027. When that happens, savers aged under 65 will undoubtedly mourn the loss of the full Cash ISA allowance. 
 
“Less than one in three Cash ISA subscribers, put in more than £12,500 into a Cash ISA, according to the latest Government savings data*, with the average subscription sitting at just £7,000 and the majority of Cash ISA savers sitting in the basic rate income tax band. Remember, these figures reflect the 2023-24 tax year and are likely to rise more sharply as the impact from the hikes to other savings and investment taxes feed through to the market. 
 
“While the Chancellor’s decision to exclude retirees from the Cash ISA cap delivers some relief for older savers, who are typically more risk averse and often have higher cash holdings to fund their retirement savings, there are other considerations. While the full ISA allowance of £20,000 remains in play, more changes will come with £8,000 of the existing ISA allowance set to be earmarked only for investments April 2027.  
 
“The Chancellor claims her move is designed to nudge more savers towards investing in stocks and shares, but this risks reducing the flexibility and freedom of choice that ISAs traditionally offer. Sceptics will see this as a move aimed at leaving more cash savings exposed to tax. Given that the average Cash ISA subscription falls well within the new cap, the change may not trigger the behavourial shift policymakers hope for. 
 
‘Notably, while the Chancellor wants a minimum allocation to investments, this won't solely be targeted at UK equities, a move demanded by some City brokers as a measure to help rejuvenate the UK stock market. 
 
“Cash ISA subscriptions grew 67% to £27.9 billion in the 2023-24 tax year – versus growth of just under 11% for Stocks & Shares ISAs – a trend driven by increased returns on savings on regular bank and building society cash pots and the appeal of tax-efficient alternatives. Taking advantage of the tax-free benefits a Cash ISA offers is a no-brainer for those with sizeable savings pots sitting in a bank or building society. Once savers breach their Personal Savings Allowance, unchanged since its inception in 2016, they become liable for tax on interest at their marginal tax rate. 
 
“With income tax thresholds now frozen until 2030-31 and interest rates still elevated compared to pre-December 2021 levels, more people are paying tax on savings interest as their salaries rise – something that will accelerate as savings tax changes come into force. Basic rate taxpayers have a PSA of £1,000, but this halves to £500 for higher rate taxpayers, while additional rate taxpayers have no allowance at all - making it essential to consider tax efficiency from the first penny. Moving up to £12,000 into a Cash ISA - where it can grow free of tax on income – will remain an effective strategy for the under 65s, but there are other options.  
 
“For committed savers, that want to continue saving more than £12,000 into a Cash ISA, investing their money in the financial markets is one solution, provided they don’t need access to their money in the short term. The overall ISA allowance remains at £20,000, so the opportunity for tax-efficient savings remains, though a time horizon of at least five years is recommended for savers considering investing in equites via a Stocks & Shares ISA. Equities, have historically delivered higher real returns –that beat inflation – than cash over the long term.  
  
“Investing in the stock market isn’t suitable for everyone, particularly the risk-averse or those that prefer to store emergency funds in cash. Even investors that do choose to divert cash into investments may want to de-risk their portfolio at certain points in their life and hold some of their long-term savings in cash, perhaps to meet a short-term financial goal such as clearing a mortgage. So, the only certainty with a restriction on cash savings and investment choice is that more savers could see a greater proportion of their money exposed to tax.  
 
Alternatives to Cash 
   
“Remember, those that prefer to hold cash can still do so within a Stocks and Shares ISA. The overall ISA allowance remains at £20,000 and there is no limit on how much of your investment portfolio can be parked in cash awaiting investment. Many investors already load up their investment ISAs with cash to ensure they take advantage of their allowance, and then take their time to invest, benefitting from the interest rate offered by their investment platform in the meantime. It is important to consider the impact of interest rates after any costs. Note that some investment platforms retain a portion of that cash interest rate, though rates have improved more recently after the regulator ticked off providers for the amount of interest some earned on client’s cash balances. 
 
“Other low-risk options cash savers can consider include money market funds. Money market funds invest in cash and near-cash instruments such as certificates of deposit, floating rate notes, Treasury Bills and short-dated government bonds. Typically used by institutional investors, such as pension funds, their better returns compared to cash have made them increasingly popular with retail investors in recent times. Again, consider the impact of account fees for holding funds on the return you receive. 
    
“When you consider that interest rates and the yields on money market funds are variable, another attractive – and relatively low-risk – option for cash investors is short-dated Gilts. These are bonds issued by the UK government that are due to mature in the next five years. Unlike cash interest rates that are expected to decline further as rates come down, when you invest in a Gilt - or another bond – you are effectively locking in the yield available today for the future – which is when the Gilt or bond matures.  
 
“Yields remain high, and the major advantage is that many Gilts already in issuance and traded on the secondary markets can be snapped up at big discounts to the prices they will eventually mature at. The predictable gains that will be made by holding these to maturity can be appealing as Gilts are exempt from capital gains tax, which makes these a very tax-efficient alternative to cash savings, particularly for higher and additional rate taxpayers.  
 
*Annual Savings Statistics for 2023-24 financial year, released September 2025