The savings organisation said it was taking the decision to "balance the interests of its savers, taxpayers and the stability of the broader financial services sector."

NS&I is unique in the UK marketplace in that it is backed by the Treasury, meaning its products are 100% protected but laws govern their management to help ensure market fairness.

It said the interest rate on the tax-free cash ISA would fall to 1.25% from 1.5% on 16 November.

NS&I said the move would affect 404,210 customers with savings of more than £3.8bn in total and it was writing to them to explain the rate reduction.

Chief executive Jane Platt said: "Interest rates in the easy access ISA market have been in decline over the year and our Direct ISA rate has stood out at the top of the best buy tables for some time.

"To ensure that we continue to strike a balance between the needs of our savers, taxpayers and the stability of the broader financial services sector, we have taken the difficult decision to reduce the rate on our Direct ISA.

"However customers continue to benefit from a competitive rate and 100% security on all their deposits."

NS&I said its decision would move the product back to the middle ground for rates available in the ISA market currently.