The cash Isa allowance will be slashed to £12,000 a year from April 2027, but only for under 65s.
Rachel Reeves will cut the amount that can be saved in cash tax-free from its current level of £20,000.
But savers over the age of 65 will still be able to use the full cash Isa allowance to save £20,000 a year tax-free.
It means from 6 April 2027, savers under the age of 65 will only be able to put a maximum of £12,000 into a cash Isa and if they want to use the whole wrapper, the remainder – £8,000 – can go into stocks and shares.
The amount that can be put in a stocks and shares Isa will remain at £20,000 in each tax year.
The move to cut the cash Isa allowance comes alongside a host of painful tax-raising measures, including an income tax freeze until 2030, which is expected to cost the average basic rate taxpayer £1,666 more in tax between now and 2030.
Isa haircut: Chancellor Rachel Reeves has slashed the cash Isa allowance to £12,000 from its current £20,000 limit
Ms Reeves’ decision to cut the cash Isa allowance is part of a plan to divert billions of pounds sitting in savings accounts into investments.
The cash Isa allowance has been under threat since February when the Chancellor announced she intended to ‘get the balance right between saving and investing’.
> Read more: The best cash Isas, with rates of up to 4.66%
City firms have lobbied the Chancellor to scale back the tax breaks on cash Isas to boost investment in the flagging UK stock market.
Since then, a lower allowance of between £4,000 and £10,000 has been floated with a slightly higher limit of £12,000 confirmed today.
The tax-friendly accounts have become the bedrock of savings plans, allowing prudent savers to save up to £20,000 in each tax year in them.
It is thought that around 40 per cent of the £726billion held in Isas is in cash rather than stocks and shares.
Savers and industry experts have made it clear that cutting the cash Isa allowance will not make those who hold money in cash Isas invest.
The Daily Mail’s Hands Off Our Cash Isas campaign, launched in February, urged Ms Reeves to avoid overhauling the Isa regime in the interest of savers.
Saving industry figures said by cutting the cash Isa allowance down to £12,000, savers are being ‘penalised for doing the right thing’.
In recent weeks, the chief executive of the Building Societies Association (BSA), Robin Fieth, warned the Chancellor that building societies use Isa deposits to fund mortgages and cutting the amount that can be held in an Isa will likely impact the number of mortgages which can be provided, and the rate charged for mortgages.
Mr Fieth says: ‘There are some groups in particular who could lose out under the cuts.
‘If you are saving for a house deposit you might have good reason for fully using the current cash Isa limit.
Jeremy Cox, head of strategy at Coventry Building Society, says: ‘A cut to the cash allowance adds yet more complexity to Isas and send the wrong message to savers, who will be penalised for doing the responsible thing.
Tory shadow chancellor Sir Mel Stride accused Labour of launching a tax raid on savers to fund Labour’s ‘addiction’ to welfare spending.
He says: ‘Hardworking savers shouldn’t be facing a tax raid to fund Labour’s addiction to ever more welfare spending.
‘Labour should be backing savers, not making them pay for the Chancellor’s failures.’
Jane Sydenham, investment director at Rathbones, one of the UK’s leading wealth and asset management firms, says: ‘Cutting the Cash Isa allowance is unlikely to move the dial in any meaningful way when it comes to encouraging more people to invest – and certainly not in British stocks.
‘Efforts to funnel retail investors into UK equities run counter to the principle of diversification, a cornerstone of good investing.
‘Those using cash Isas are generally not choosing cash as an investment, but as a stepping stone for short-term goals like a house deposit, while benefiting from tax-free interest.
‘Money displaced from cash Isas would likely end up in taxable savings accounts, not the stock market.
‘Forcing risk-taking isn’t the answer – education and choice are. The Government should focus on carrots, not sticks.’
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