Chancellor announces cash Isa U-turn, but hikes savings tax further

New Chancellor John Healey has abandoned the proposed cut in the cash Isa allowance to £12,000, and it will now remain at £20,000 after concluding the original decision was unlikely to encourage more people to invest in stocks and shares.

The U-turn, announced at this year's Autumn Budget, undoes the controversial plan announced by the previous Chancellor, Rachel Reeves, which would have seen the annual cash Isa allowance slashed to £12,000 for under-65s from April 2027.

The reversal on the allowance cut will be greeted warmly by savers, who had been braced for complicated new 'anti-avoidance' rules, such as a proposed ban on transfers from stocks and shares Isas to cash Isas, which will likely now be dropped.

However, the Chancellor also announced that rates of tax on savings interest would rise by another two percentage points across all tax bands from April 2027 – which is on top of the two percentage point rise that was already due to come into effect next year.

Here we explain why the cash Isa allowance cut has been scrapped, what the rates on savings tax will be from April and what the changes mean for your money.

• Find out more: Autumn Budget 2026 key points.

Why is the Chancellor reversing the cut to the cash Isa allowance?

The original plan from Rachel Reeves was intended to encourage the public to invest more in British companies through stocks and shares Isas, but it faced criticism for adding complexity to an already complicated Isa landscape without any evidence it would encourage more people to invest. 

With this plan now scrapped by Mr Healey, the cash Isa limit will remain at £20,000 a year for all adults.

Cash Isas are popular with the British public, with subscriptions growing by 37.5% (£26.1bn) in 2024-25 according to HMRC, and cash accounting for 64% of all Isa subscriptions.

Ahead of the Budget, director of public policy at AJ Bell Tom Selby commented: 'While the central aim of encouraging more people to invest for the long-term was the right one, the route Healey’s predecessor chose to achieve this was painfully convoluted, hardening the border between short-term saving and long-term investing, and adding overwhelming complexity – not to mention a tax charge – into the system in the process.'

On the other side of the fence, Michael Healy, chief executive of IG Consumer, said of the change: 'The Chancellor has squandered a golden opportunity to help British households build long-term wealth and get more money flowing into the businesses that drive our economy. At a time when Britain desperately needs growth, protecting tax incentives that encourage people to sit on cash rather than invest is a deeply misguided decision.'

• Find out more: best stocks and shares Isas.

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How will tax rates on savings income change? 

When you earn interest above a certain amount on savings held outside of an Isa, it's subject to income tax. Previously, the thresholds for tax on savings interest were the same as those for other forms of income (in England, Wales and Northern Ireland), such as employment or a pension.

However, last year it was announced that rates on savings interest, as well as property income, would rise by two percentage points from April 2027. At this year's Budget, the Chancellor revealed another two-percentage-point rise on savings interest and property income, on top of the two-point rise already pencilled in.

For example, interest previously taxed at 20% will be taxed at 24% from April 2027.

Here's how they look currently, and how they will change for savings interest: 

Note that the money earned from savings counts towards the tax bracket you're in.

Most people are eligible for the personal savings allowance, which allows basic-rate taxpayers to earn up to £1,000 in savings interest a year before paying tax, and higher-rate taxpayers to earn up to £500.

Low earners on less than £17,570 could earn up to £5,000 in savings interest tax-free – known as the starting rate for savings.

Plus, if you haven't used your basic personal income allowance of £12,570 on your wages, pension or other income, you can use your personal allowance to earn tax-free savings interest.

• Find out more: how your savings are taxed.

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How much could this cost you?

The average person in the UK has £19,214 in savings in 2026, according to data from Finder.

The top instant access savings account, paying 5%, would earn you £961 interest on that amount. A basic-rate taxpayer would pay no tax on this thanks to the personal savings allowance, which lets basic-rate taxpayers earn up to £1,000 in savings interest tax-free.

However, a higher-rate taxpayer would pay tax on this since their personal savings allowance is only £500. Interest earned over this amount will attract tax at 44% from April 2027.

This means a higher-rate taxpayer would need to pay 44% tax on the remaining £461 (£961-£500), resulting in a tax bill of £203.

You can avoid paying any tax by shielding your savings in a cash Isa.

Best cash Isa accounts on the market

• Find out more: best cash Isas.

Are premium bonds an alternative to cash Isas?

Owning NS&I premium bonds enters you into a draw where the prizes are entirely tax-free, even if you win the top prize of £1m.

However, you can only hold up to £50,000 in premium bonds.

Plus, as it's a lottery, you could win less than you'd get in interest from a savings account (even after tax) – or nothing at all.

NS&I can and does tweak the prize pool and the odds of winning higher or lower prizes.

• Find out more: discover if you've won a premium bond prize.