What Is a Cash ISA? How They Work — And the Allowance Cut Coming in April 2027
A Cash ISA is a savings account where interest is permanently free of UK income tax. This guide covers how Cash ISAs work, the annual allowance, flexible ISA rules, ISA transfers, and the allowance reduction coming in April 2027.
What is a Cash ISA?
A Cash ISA is a savings account where the interest you earn is free of UK income tax — regardless of how much you earn or what rate of income tax you pay. The ISA wrapper — the tax-free status — applies permanently to money inside the account. Interest earned inside a Cash ISA does not count towards your Personal Savings Allowance and does not need to be declared on a self-assessment tax return. (Source: GOV.UK, ISA rules.)
This is the defining feature. A standard savings account pays interest subject to income tax above your Personal Savings Allowance (£1,000 for basic-rate taxpayers, £500 for higher-rate, nil for additional-rate). A Cash ISA pays interest that is permanently tax-free.
How the annual ISA allowance works
Each tax year (6 April to 5 April), you can deposit up to £20,000 across all your ISA accounts combined — the annual ISA allowance for 2026/27. It is shared between all ISA types: Cash ISA, Stocks and Shares ISA, Innovative Finance ISA and Lifetime ISA. Unused allowance at 5 April is lost and cannot be carried forward. (Source: GOV.UK.)
Since April 2024, you can open more than one Cash ISA in the same tax year with different providers, subject to the overall £20,000 annual limit. To open a Cash ISA you must be 18 or older and a UK resident for tax purposes. (Source: GOV.UK, ISA changes, April 2024.)
Types of Cash ISA
Cash ISAs are available in the same structures as standard savings accounts — the difference is the tax-free wrapper:
| Type | Rate | Access |
|---|---|---|
| Easy access Cash ISA | Variable | Normally without a notice period |
| Notice Cash ISA | Variable | After a notice period (30–120 days) |
| Fixed-rate Cash ISA | Fixed for the term | Usually restricted until maturity |
Flexible vs non-flexible Cash ISAs
Some Cash ISAs are designated as flexible. This matters if you withdraw money during the tax year and want to replace it:
The flexibility designation is set by each provider. If an account is not specifically described as flexible, it should be assumed to be non-flexible. The flexible rule applies within the same tax year only. (Source: GOV.UK; LegalClarity, May 2026.)
Transferring a Cash ISA
You can transfer a Cash ISA to a different provider without losing its tax-free status — but the transfer must go through the official ISA transfer process. If you withdraw the money yourself and redeposit elsewhere, it loses its ISA status permanently and can only be returned to an ISA using your current-year allowance. To transfer, instruct the receiving provider, who will arrange the transfer directly. (Source: GOV.UK; Moneyfarm, 2026.)
Cash ISAs and the Personal Savings Allowance
Whether a Cash ISA rate is preferable to a taxable account depends on your Personal Savings Allowance and individual tax position. The PSA is £1,000 for basic-rate taxpayers, £500 for higher-rate and nil for additional-rate. For savers whose interest does not exceed their PSA, the rate is the most relevant comparison. For higher-rate or additional-rate taxpayers, or those with larger balances, the tax-free wrapper may make a meaningful difference even where a Cash ISA's headline rate is slightly lower.
Tax treatment depends on individual circumstances and may change. (Source: GOV.UK; LegalClarity, May 2026.)
FSCS protection
Cash ISAs at UK-authorised banks and building societies are protected by the FSCS up to £120,000 per eligible person per authorised firm. Different banking brands can share the same banking authorisation.
The rest of this article covers the Cash ISA allowance change announced for April 2027 — what is changing, who it affects and the key dates.
What's actually changing
The total annual ISA allowance stays at £20,000. What changes is how you can split it.
From 6 April 2027, if you're under 65:
- Maximum £12,000 into cash ISAs per year
- The remaining £8,000 can go into investment-type ISAs — Stocks & Shares, Innovative Finance, or Lifetime ISA
- There is no obligation to use the £8,000 investment portion — you can simply contribute less than the full £20,000
- You will no longer be able to transfer money in from a Stocks & Shares ISA or Innovative Finance ISA into a Cash ISA
This is the first cut to the cash ISA allowance since 2017, when it was raised from £15,240 to £20,000. The Chancellor's stated aim is to encourage more people to invest rather than hold large sums in cash.
If you're 65 or over: nothing changes for you. You keep the full £20,000 cash ISA allowance. The government explicitly exempted over-65s following sustained lobbying, recognising that older savers often need accessible, low-risk savings in retirement.
Why the government did this
The policy follows years of debate. At the Mansion House speech in July 2025, Reeves had been expected to cut the limit to £4,000 — but backed away amid fierce resistance from building societies, who rely on cash ISA deposits as a critical source of funding for mortgage lending. The £12,000 figure is a compromise between those who wanted a much lower cap and those who opposed any cut at all.
Whether the policy achieves its aim is genuinely uncertain. Critics point out that risk-averse savers may simply move money into taxable savings accounts rather than the stock market — which would undermine the stated goal while also reducing the tax protection available to ordinary savers.
Who this actually affects
Fewer people than the headlines suggest. Most people who open a cash ISA contribute well below £12,000 per year. The average cash ISA subscription is significantly below the current £20,000 limit.
The compounding problem: savings tax rises at the same time
This is the part that doesn't get enough attention. The cash ISA cut doesn't arrive in isolation. The Autumn Budget 2025 also announced that from April 2027, the tax rate on savings interest earned outside an ISA is proposed to rise by 2 percentage points across all bands — from 20% to 22% at basic rate, from 40% to 42% at higher rate, and from 45% to 47% at additional rate. This is a separate announcement from the dividend tax increases already taking effect in April 2026. The cash ISA allowance cut itself has moved further along than a Budget announcement: HMRC published a technical consultation on the draft Individual Savings Account (Amendment) Regulations 2026 on 16 July 2026 (closing 2 August 2026), and it remains due to take effect 6 April 2027. The savings tax rise is separate and remains subject to Finance Bill legislation — the direction is clear but verify final rates when the Bill passes. (Source: GOV.UK; HMRC technical consultation, July 2026.)
There's also an anti-avoidance measure worth knowing about. HMRC confirmed on 23 June 2026 that from April 2027, a flat 22% charge will apply to interest earned on cash held within a Stocks & Shares ISA or Innovative Finance ISA — separate from the tiered rates above, and applying to everyone regardless of age or tax band. This closes off using an investment ISA's cash buffer as a workaround once the £12,000 cash ISA cap takes effect. (Source: HMRC, 23 June 2026.)
The Personal Savings Allowance (£1,000 for basic-rate taxpayers, £500 for higher-rate) remains unchanged. The combined effect: less shelter from the ISA, and higher tax on anything that overflows into a taxable account. Both changes point in the same direction — making use of your ISA allowance now, while you still have full flexibility, is more valuable than it has ever been.
Based on proposed April 2027 rates as announced in the Autumn Budget 2025. Subject to final legislation.
The one-year window: what to do before April 2027
You have one full tax year left under the current rules — 2026/27. The new £12,000 limit applies from 2027/28 onwards. Here is how to use the time you have left.
Key dates at a glance
The Lifetime ISA: what's happening
The Budget documents confirmed the Lifetime ISA will be replaced by a new first-time buyer product, with a consultation published in early 2026. Until the replacement is confirmed and available, the LISA continues to operate as before: £4,000/year maximum, 25% government bonus, for a first home purchase up to £450,000 or retirement from age 60. The LISA counts towards your overall £20,000 annual ISA allowance. LISA and Junior ISA limits are confirmed unchanged until at least April 2031.
If you currently hold a LISA and are planning to use it for a home purchase, it is worth monitoring the consultation for any changes to the £450,000 property price threshold — this has been flagged as an area for review given how much house prices have risen since the LISA launched in 2017.