Cash ISA Limit Cut to £12,000: Your Complete Guide to the New ISA Rules (2027)

Starting 6 April 2027, the landscape of tax-free saving in the UK will shift significantly. While the headline annual Individual Savings Account (ISA) allowance remains at £20,000, the way you are permitted to allocate those funds will change for the first time in a decade.

If you are under the age of 65, you will soon face a mandatory split in your annual contributions. This guide breaks down the new "12/8" rule, the exemptions for retirees, and how to navigate the different types of ISAs available to protect your wealth.

Breakdown of the New Rules: The £12,000 Cash Cap

From 6 April 2027, the government is introducing a two-tier system for ISA contributions based on age.

• The £12k Cash Limit: New contributions into a Cash ISA will be capped at £12,000 per tax year for anyone under 65.
• The £8k Investment Requirement: To utilize your full £20,000 annual allowance, the remaining £8,000 must be directed into "investment-type" ISAs, such as Stocks and Shares or Innovative Finance ISAs.
• Total Allowance Stays at £20k: The overall limit is not changing; the government is simply restricting how much of it can be held in cash to encourage more retail investment in the UK economy.
• Protection for Existing Savings: These rules only apply to new money added after the start of the 2027/28 tax year. Any funds already held in your ISA from previous years will remain tax-free and protected.

Understanding the Different Types of ISAs

To successfully manage the upcoming mandatory split, it is vital to understand the four main adult ISA types and their risk profiles.

• Cash ISA: Functions like a standard savings account where you earn tax-free interest. These can be instant access or fixed-term, providing a stable way to save without exposure to stock market volatility.
• Stocks and Shares ISA: An investment account that allows you to buy assets like shares, bonds, and funds. There is no £12,000 cap here—you can still choose to put your entire £20,000 allowance into this type if you are comfortable with market risk.
• Innovative Finance ISA (IFISA): A more specialized option where you lend your money directly to borrowers or businesses via peer-to-peer (P2P) platforms. While they offer potentially higher returns, they are considered high-risk and are not covered by the Financial Services Compensation Scheme (FSCS).
• Lifetime ISA (LISA): Designed for those aged 18–39 to help them save for their first home or retirement. You can pay in up to £4,000 per year, and the government adds a 25% bonus (up to £1,000 annually).

The Over-65s Exemption Explained

The government has included a specific exemption for retirees, acknowledging that they often have a lower risk tolerance and rely on the security of cash for their retirement income.

• Retirement Flexibility: If you are 65 or older by the start of the tax year, you are exempt from the £12,000 cash cap.
• Full Allowance in Cash: Savers in this age bracket can continue to subscribe the full £20,000 into a Cash ISA if they wish.
• Age Clarification: For those who turn 65 mid-way through a tax year, the government will clarify exact contribution rules in 2026 following further consultation.

Personal Savings Allowance (PSA) vs. ISA: When to Use Which?

For high-net-worth individuals, the choice of where to hold cash is becoming a critical tax decision due to shifting tax rates.

Expert Insight: From April 2027, the tax on savings interest earned outside an ISA will rise by 2 percentage points across all bands. For an additional-rate taxpayer, nearly half (47%) of their interest will be taken by HMRC. This makes the "tax-free wrapper" of an ISA more valuable than ever, even with the new contribution restrictions.

Investment Options for the Mandatory £8,000

If you are under 65 and wish to max out your allowance, the £8,000 investment portion might seem daunting. However, Stocks and Shares ISAs offer various ways to manage risk:

• Government Gilts and Bonds: Often considered lower risk than equities, these provide more stability than a pure equity fund.
• Multi-Asset Funds: These "ready-made" portfolios spread your money across stocks, bonds, and real estate to balance risk and reward.
• Dividend Reinvestment: For business owners, focusing on UK companies that pay regular dividends can provide a tax-free supplement to your income.

Warning: HMRC is introducing "eligibility tests" to ensure that "cash-like" instruments aren't used within a Stocks and Shares ISA to bypass the £12,000 cash limit.

Strategies for Lump Sum Savers

Whether you have received an inheritance, sold a property, or exited a business, managing large sums requires a multi-year strategy under the new rules.

• Maximize the "Pre-2027" Window: The £12,000 limit only applies to new contributions from April 2027. Savers should aim to maximize their full £20,000 Cash ISA allowance in the 2025/26 and 2026/27 tax years while they still can.
• The "Bed & ISA" Strategy: If you have investments outside a tax wrapper, you can sell them and immediately repurchase them within your ISA. This is useful for moving £8,000 of taxable investments into the Stocks and Shares ISA portion each year.
• Spousal Transfers: Couples can effectively protect £24,000 in cash annually by utilizing both of their £12,000 individual limits.

Timeline: What to Do Before April 2027?

• Now – April 2026: Review your current cash holdings. Move any taxable cash into an ISA now to take advantage of the current £20,000 flexibility.
• April 2026 – April 2027: This is the final year of the "old" rules. Use this window to build up your tax-free cash base.
• 6 April 2027: The new limits kick in. Review any automated monthly savings to ensure they do not exceed the £1,000 per month (£12k/year) Cash ISA cap.

FAQs on the New ISA Rules

1. Will my existing Cash ISA be affected by the £12,000 limit?

No. The cap only applies to new contributions from April 2027. Any money already in your account from previous years remains protected and tax-free.

2. Can I still transfer my ISA?

Yes, but with new restrictions. From April 2027, under-65s will likely be prevented from transferring funds from a Stocks and Shares ISA back into a Cash ISA to prevent bypassing the new limits.

3. Which one is better: Stocks and Shares vs. Cash?

Cash offers security, but investments have historically provided higher returns over 5+ years. The "best" choice depends on your age, goals, and when you need the funds.

4. What happens if I pay more than £12,000 into a Cash ISA?

HMRC will implement new tracking systems to identify excess contributions. You may be charged a fee, or the excess funds may lose their tax-free status.

Speak to Our Financial Planning Team

The reduction in Cash ISA limits, combined with rising tax rates on savings interest, makes proactive planning essential. Contact Accounted today to ensure your portfolio is tax-efficient and ready for the 2027 transition.

Would you like me to help you create a specific investment plan for the mandatory £8,000 portion of your allowance?