National Savings & Investments (NS&I) will cut the rate on its tax-free ISA account by 0.25 of a percentage point to 1.25%.
The cut comes after NS&I found itself with bumper inflows of cash.
It is required under government rules to ensure that it does not stifle competition in the rest of the market.
NS&I's Direct ISA, with market-leading returns, had been attracting upwards of Â£800m a year from savers desperate to find a reasonable return, while taking advantage of a 100% government guarantee.
Even more significant was the boost from the highly popular Pensioner Bonds and by the Premium Bond maximum limit going up to Â£50,000.
Jane Platt, chief executive of NS&I, said it was a "difficult decision" but the institution had to "strike a balance between the needs of our savers, taxpayers and the stability of the broader financial services sector".
The cut will apply to Â£3.8 billion of savings from 16 November.
More than 400,000 customers of government-backed National Savings will see their interest rates cut from mid-November.