The ISA system is changing in two directions at once. From April 2027, under-65s will face a reduced annual cash ISA allowance of £12,000 (down from £20,000) alongside a set of new rules designed to stop savers finding ways around it.
Separately, the government has launched a consultation on a replacement for the Lifetime ISA (LISA), a new First Time Buyer ISA aimed at stripping out the features that made the original product so problematic.
Below Trustnet outlines the latest government announcements around ISA reform.
The cash ISA crackdown
The cut to the cash ISA limit was announced at Autumn Budget 2025. However, new this week is the detail of how the government intends to enforce it. Three anti-circumvention rules will come into force alongside the lower limit: a 22% flat-rate charge on interest paid on cash held inside stocks and shares ISAs; a ban on holding 100% of a stocks and shares ISA in money market funds; and a prohibition on transfers from stocks and shares ISAs into cash ISAs for anyone under 65.
The logic is to prevent savers from parking money in investment wrappers purely to access cash-equivalent returns, then shifting it back into a cash ISA to sidestep the lower allowance.
Rachel Vahey, head of public policy at AJ Bell, argued the reforms do the opposite of what they set out to achieve.
“Riddled with unintended consequences, the reforms do little to encourage new investors,” she said. “Faced with increasingly complex ISA rules, many would-be investors will stick with what they know: cash.”
The 22% charge on cash interest applies at a flat rate regardless of whether the ISA holder pays income tax at all, meaning that a basic-rate taxpayer and a non-taxpayer face the same levy. And while the 100% money market fund restriction sounds targeted, the rules allow a saver to hold 99% of their portfolio in money market funds as long as 1% sits elsewhere.
There is also a timing problem. Savers who want to de-risk ahead of April 2027, moving from a stocks and shares ISA into cash as they approach retirement or a major purchase, will need to act before the transfer ban comes into force. Those who miss the window lose that flexibility permanently, unless they are 65 or over.
Pre-election, the government signalled ambitions to simplify the ISA system and close the gap between saving and investing. For Vahey, “so much more could have been done to simplify consumer choice”.
Michelle Holgate, director and wealth manager at RBC Brewin Dolphin, noted that “the reforms are subject to a technical consultation which may result in some final changes,” a reminder that the rules announced are not yet final.
The First Time Buyer ISA
For the second set of changes, the government has launched a consultation on a new First Time Buyer ISA to replace the Lifetime ISA – a product that has attracted sustained criticism since its launch in 2017.
The headline problem with the LISA was its withdrawal charge: savers who needed to access their money for any reason other than buying a qualifying home or reaching the age of 60 faced a 25% penalty that clawed back not just the government bonus but a slice of their own savings.
By 2024-25, 8% of all LISA accounts had incurred an unauthorised withdrawal charge – more holders had lost part of their own savings than had used the product to buy a home.
With the proposed replacement product, the government bonus would be paid only when a saver buys their first home, not upfront, which removes the need for a withdrawal charge entirely. Savers whose circumstances change can access their money without penalty; they simply do not receive the bonus.
Rachael Griffin, tax and financial planning expert at Quilter, welcomed this. “Allowing people to access their money when needed while still being incentivised to save towards a deposit for a first home would be a much better design,” she said.
The removal of an upper age limit is the other significant change. The LISA shut out anyone who had not opened an account before turning 40, which made less sense with the average age of first-time buyers rising steadily.
Yet, key details remain unconfirmed. The government has not set the annual subscription limit, the level of the government bonus or the property price cap – all of which will be announced at a future fiscal event.
Vahey pointed out that without knowing the bonus rate or limits, it is impossible to judge whether the new product genuinely improves on its predecessor.
There is also an issue the consultation has not resolved. The existing £450,000 property price cap, unchanged since 2017, has become disconnected from prices in London and the South East.
Griffin noted that the consultation “goes as far as suggesting that the existing cap is suitable,” leaving savers in high-cost areas facing the same barrier that undermined the LISA.
For existing LISA holders, transfers from a LISA into the new FTB ISA will not be permitted. Both products can be used towards the same purchase but savers will be managing two accounts rather than one.
“It is vital,” Griffin said, “that the final FTB ISA design avoids simply recreating the same barriers and confusion that have undermined confidence in the Lifetime ISA.”