Cash ISAs: Will Rachel Reeves bring in a ‘tax on savings’?
The financial industry has split over whether Chancellor Rachel Reeves should be cracking down on cash ISAs to encourage investment.
While Reeves has ruled out scrapping cash ISAs completely, the Treasury is currently mulling whether to bring the limit for them down to just £4,000 a year.
Currently, investors have a tax-free allowance of £20,000 to deposit into ISAs, which can be split between cash ISAs and stocks and shares ISAs. Brits currently hold around £300bn in cash ISAs.
However, stocks and shares ISAs have historically provided better returns in the long-run, while also allowing billions to be invested back into the British economy.
Last week, it was revealed that Reeves was in talks with senior City executives to consider ways to bolster UK economic growth, including whether to reign in cash ISAs to push savers into stepping up their investment contributions.
“It is really important that we support people to save, to achieve their aspirations,” said Reeves. “At the moment, there is a £20,000 limit on what you can put into either cash or equities, but we want to get that balance right.”
Cash ISA reform?
Reform of ISAs was pledged by Labour in the run up to last year’s election, and many in the financial industry have been calling for changes for some time.
In December, AJ Bell boss Michael Summersgill told Morning Wire that ISA simplification was expected to be a priority for Reeves in 2025.
AJ Bell and other investment platforms have been pushing for simplification through a combination of Cash, Stocks and Shares, Junior and Innovative Finance ISAs in a single product.
City fund managers have also backed the changes, arguing that savers are too reliant on the tax-free vehicles and should be looking to the stock market to fight against inflation.
Analysis from Quilter last week found that despite a seven-month period of cash ISAs bringing in returns above inflation, £10,000 invested in a cash ISA in December 2012 would have only £11,955, or just £7,918 when adjusted for inflation.
Speaking at the Morning Wire summit last year, Peter Harrison, then chief executive of FTSE 100 funds group Schroders, said products like a child’s cash ISA were “almost criminal” due to fact the savings would be eroded by inflation.
However, other areas of the financial world have come out swinging against the proposed reforms, calling it a ‘tax on savings’ and arguing that cash ISAs play an important role for many Brits.
“Cash ISAs form a key part of many people’s savings,” said Building Societies Association chief Robin Fieth. “Banks, building societies, credit unions and other providers use the deposits to fund loans to households and businesses.”
The reforms have also been criticised as potentially ineffective, as Brits are frequently putting away too little in savings to be affected by the shifting limit.
“This is not the silver bullet for stepping up investment in UK equities, given that about 67 per cent of annual contributions to cash ISAs are less than £5,000,” noted Charles Hall, head of research at Peel Hunt.
On average, Brits put £295 a month into their cash ISAs, or just above £3,500, according to data from Sheperds Friendly, meaning that most would not be encouraged to invest more by the changes.
Meanwhile, analysis from Vanguard found that a quarter of their customers held more than five per cent of their Stocks and Shares ISA in cash, with a third of those holding at least 50 per cent in cash.
“We know that over the long-term stock market performance outstripped cash returns,” said James Norton, head of retirement and investments at Vanguard Europe.
“Cash is a drag on investment returns and savers run the risk of falling short of long-term goals if they keep savings – put in an investment product to grow wealth – in cash.”
The best cash ISA
With an interest rate of 4.55 AER, the account is currently the best on the market (as of 24 February 2025). Savers who sign up with Hargreaves Lansdown and deposit at least £3,500 between now and 5 April are entered into a prize draw with a chance of winning £50,000.
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