Budget announces savings tax to rise as cash ISA allowance falls

The latest Budget brought news that many savers were expecting, although it still won’t be welcomed by many. The cash ISA allowance is set to be reduced, but that’s not the only change coming down the line for savers.  

What has been announced?

First, the cash ISA allowance will drop to £12,000 from April 2027, which does at least give savers a chance to make the most of this valuable allowance until then.  

However, savers aged 65 and over will still be able to use the full ISA allowance for their cash savings. This will be a relief, as we know that many older savers prefer cash as they look to reduce the volatility of their investments and savings in retirement.

And just to be clear, it’s only the cash ISA allowance that is to be cut. The overall ISA allowance remains at £20,000, but anyone under 65 who wants to make use of the full amount will need to put the remaining £8,000 into investments rather than cash.

The cut to the cash ISA allowance isn’t the only change coming. It was also announced that tax paid on savings interest will rise by 2% - again from April 2027. This means basic-rate taxpayers will pay 22%, higher-rate taxpayers will pay 42% and additional-rate taxpayers will pay 47% on interest earned outside an ISA. This is a double blow that could see many people paying more tax on their hard-earned savings at a time when every penny counts.

The Personal Savings Allowance (PSA) will still be in place for basic and higher-rate taxpayers, allowing some interest to be earned tax-free outside an ISA. Basic-rate taxpayers get an allowance of £1,000 each year, while higher-rate taxpayers get £500, but additional-rate taxpayers do not receive any allowance at all.  

With the best savings rates around 4.50%, even a basic-rate taxpayer will use up their entire allowance with a deposit of just over £22,000, which shows that it isn’t only the really wealthy who will feel the impact of these changes.

What can savers do to soften the blow?

As savers have until April 2027 until the changes to the cash ISA allowance come into force, there is time to take action.

It sounds obvious, but of course the first thing to do is to make sure you use your ISA allowance in full before the changes take place. And it makes sense to do this as soon as possible in the tax year. Why pay tax on your savings all year when you needn’t!

It is also worth looking at any older ISAs you may have. Rates have improved recently, as there is far more competition between providers at the moment. Many people leave their money with their high street bank, assuming they are earning a fair rate, but this is often not the case. If your ISA is lagging behind the market, it may be worth transferring it. The only thing to watch out for is fixed-term ISAs, which usually carry penalties if you try to move them before they mature, so it is worth checking the numbers before making a decision.

National Savings & Investments (NS&I) Premium Bonds could also play a part in your savings strategy, especially for anyone who pays tax on interest. Winnings are tax-free, and while there is no guaranteed return, the current prize fund rate of 3.60% is equivalent to a 4.50% return for basic-rate taxpayers, 6% for higher-rate taxpayers and 6.55% for additional-rate taxpayers if they held a normal taxable savings account paying interest. No standard savings accounts currently offer anything close to that for higher or additional-rate taxpayers.  

Of course, you could win less than this or even nothing, although the latter is highly unlikely if you have a larger holding in Premium Bonds.

How will these changes affect savers?

Currently the best 1-year fixed rate bond is paying 4.50% AER, whilst the top 1-year ISA is paying 4.30%. On the face of it, this would suggest that you’ll get back less if you use the ISA, but if you are a taxpayer and already fully utilising your Personal Savings Allowance, then this cut to the ISA allowance will have a painful impact, as the bond rate of 4.50% will fall to 3.51% for basic rate taxpayers and 2.61% for higher rate taxpayers!

Under the current rules and the rates currently available, putting £20,000 into a top-paying ISA at 4.30% would earn £860 in tax-free interest. After the allowance is cut, a basic-rate taxpayer would be limited to earning £516 tax-free on £12,000, with the remaining £8,000 earning £280.80 in the current best fixed rate bond paying 4.5% after the deduction of tax. This brings the total return down to £796.80. For a higher-rate taxpayer, the same scenario would see the total fall to £724.80.

While many savers will probably be worried about these changes, being aware of them as soon as possible makes it much easier to plan. Making full use of your cash ISA allowance now, checking the rates on your existing accounts and considering options such as Premium Bonds can all help keep more of your interest out of the taxman’s reach. 

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Rates correct as at 28/11/2025.

This article is intended for general information only, it does not constitute individual advice and should not be used to inform financial decisions.

The Financial Conduct Authority (FCA) does not regulate cash or tax advice.