From April 2027, the annualISA allowance will drop from £20,000 to £12,000. This is one of the biggest changes to personal savings in years, and it will affect anyone who uses ISAs to shelter their savings from tax.

Below is a simple breakdown of what the change means, how much tax you could end up paying, and how much interest the £8,000 difference would generate outside an ISA.

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What’s Changing?

Right now, you can put up to £20,000 per tax year into ISAs (Cash ISA, Stocks & Shares ISA, or a mix).
From 6 April 2027, this cap will fall to £12,000.

That means £8,000 of savings each year can no longer be protected from tax unless you’ve already used previous allowances or have investments elsewhere.

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Why This Matters

ISAs protect your interest, dividends and capital growth from tax.
When £8,000 can no longer go inside an ISA, any interest earned on that amount in a normal savings account becomes taxable.

Many savers will now reach their Personal Savings Allowance (PSA) much quicker:

• Basic-rate taxpayers: PSA £1,000
• Higher-rate taxpayers: PSA £500
• Additional-rate taxpayers: PSA £0 (no allowance)

This means the reduction could push more people into paying tax on savings for the first time.

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How Much Interest Would the £8,000 Difference Earn?

Assuming the £8,000 sits in a standard savings account at 3% interest:

£8,000 × 3% = £240 interest per year

That £240 interest would be tax-free inside an ISA, but after 2027 it may be taxable depending on your PSA.

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Will You Pay Tax on That £240 Interest?

If you are a basic-rate taxpayer (PSA £1,000):

No tax – £240 is below your £1,000 allowance.

If you are a higher-rate taxpayer (PSA £500):

Still no tax – £240 is below £500.

If you are an additional-rate taxpayer (PSA £0):

Yes – you will pay tax immediately.

Tax due:

• £240 × 47% = £112.80 tax

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When Would You Start Paying Tax?

Using a 3% interest rate, your non-ISA balance must generate interest above your PSA before tax applies.

Basic-rate taxpayer (PSA £1,000):

You’d need savings of about £33,334 outside an ISA at 3% before you pay tax.

Higher-rate taxpayer (PSA £500):

You’d need about £16,667 outside an ISA at 3% before you pay tax.

Additional-rate taxpayer:

You start paying tax on every pound of interest, including the £240 generated by the £8k.

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What This Means for Savers Going Forward

• More people will hit their PSA sooner.
• High-rate and additional-rate taxpayers feel the impact most.
• ISA planning will become more important, especially for long-term investors and those building larger savings pots.
• Couples should consider splitting savings to maximise two PSA allowances where possible.

The government may be reducing the allowance, but smart planning can still minimise tax on your savings.