Savers will see major changes to how they protect their money after Chancellor Rachel Reeves confirmed in her Budget that the annual cash ISA allowance will be cut to £12,000 from April 6 2027.
Ms Reeves told MPs the existing £20,000 threshold will be reduced.
£8,000 has been reserved for investment.
The stocks and shares ISA allowance remains at £20,000.
The £12,000 limit is higher than the £10,000 ceiling examined earlier in the policy process but still marks a notable tightening of the rules.
The announcement forms part of wider Treasury plans to boost stock market participation among British investors.
For years, individuals have been able to shelter up to £20,000 each year from tax in cash-based ISA products.
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Financial institutions have long voiced mixed opinions about the prospect of a reduced allowance.
Building societies previously warned that any cut would damage their ability to provide mortgage lending.
They said a fall in cash ISA deposits could limit their funding capacity and potentially drive up borrowing costs for homebuyers.
Investment platforms, however, have argued that the allowance remained too high and urged the Treasury to go further.
Some firms lobbied for halving the allowance or scrapping limits on cash ISAs altogether.
Their position reflects a desire for more investment to flow into share-based products, and today’s announcement appears intended to strike a middle ground between these competing views.
The Chancellor also confirmed that plans for a British ISA have been formally abandoned following months of industry criticism.
The proposal would have required investors to allocate at least 20 per cent of their holdings to UK equities.
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Designed to curb the movement of domestic investment overseas, the scheme faced strong resistance from ISA providers and the Investment Association.
The Budget confirmation marks the end of a turbulent policy journey.
Former Chancellor Jeremy Hunt first introduced the British ISA concept in his Spring Budget in 2024.
Labour initially dropped the plan in September following widespread sector pushback, before the Treasury looked again at whether a revised version could be delivered.
Renewed resistance ultimately blocked any progress.
The measure is expected to increase revenue while encouraging greater use of tax-efficient accounts.
Harriet Guevera, Chief Saving Officer at Nottingham Building Society, said: “The decision to slash the annual Cash ISA allowance from April 2027 is a sucker punch for savers and deeply disappointing for lenders.
"We support the Government’s aim to boost an investing culture in the UK, but restricting choice is not the way to do it.
“At a time when financial confidence is already fragile, cutting the allowance sends a difficult message to households who are trying to do the right thing.
“Millions of savers rely on Cash ISAs as a low-risk way to build financial stability. Two thirds of our Cash ISA customers have used the full £20,000 allowance so far this year.
"These aren’t people with excess wealth - they’re individuals and families working hard to save for the future.
“What’s more, only 38 per cent of Cash ISA holders nationwide would consider switching to a Stocks and Shares ISA if the allowance is cut."