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The government is facing calls to limit the cash ISA to £4,000 per year (in contributions). The proposal, if adopted, could raise more tax revenues for the exchequer if more people end up paying tax on their savings interest. However, the move could also discourage saving, which could leave households more vulnerable to financial hardship.
Below, our Carlisle financial planners at Vesta Wealth discuss the case for lowering the cash ISA limit to £4,000 per year, the likelihood of it happening, and what individuals can do to shield their savings from needless taxes.
What is happening with the Cash ISA
The UK stock market has been “unloved” for some time now. Since the 2008 financial crisis (and exacerbated by the Brexit vote in 2016), the UK market has been shrouded by varying degrees of uncertainty. Investors typically dislike instability like this, and the UK has also long suffered from a lack of exposure to technology companies that have driven such high growth in places like the US (Silicon Valley).
The Chancellor, Rachel Reeves, has been meeting with UK financial services leaders to discuss ways to drive more investment into UK markets. One issue is that many British people put “too much” money into savings instead of investing (where greater returns could be available).
By introducing a Cash ISA “limit” – say, of £4,000 per year – British savers might be more likely to divert some of their savings into investment contributions. Currently, an individual gets an ISA allowance of £20,000 per year, all of which can be used to save money into an ISA.
The proposed £4,000 limit would not change this allowance but would require that the remaining £16,000 be committed elsewhere – e.g. to a Stocks & Shares ISA, a Lifetime ISA or an Innovative Finance ISA. However, the proposal is facing a lot of backlash.
How are people responding?
Cash ISA savers are widely concerned about the proposal. A recent poll of 2,000 ISA savers showed 20% believing a £4,000 limit would hinder their ability to save for a property. For young respondents (25-34-year-olds), 41% took this view.
Over a third argued that it would undermine their ability to build up an emergency fund and save for retirement. Banks and building societies (e.g. the Building Societies Association) seem to be against the proposal, with many investment firms in favour.
A lack of consumer education and awareness complicates the discussion. Only 67% of cash ISA savers are aware of Stocks & Shares ISAs. Knowledge is likely to be even lower amongst those who do not use a Cash ISA (almost 8 million people do use one).
As financial planners, this is an area where we can help bring people in Carlisle up to speed.
Would it work?
It is certainly true that many people save too much in cash ISAs. Over 26 years, £1,000 of savings put into a Cash ISA in April 1999 could have turned into £2,016. By contrast, had the money been invested into global equity funds, it could have grown to £4,641.
Cash is typically a poor asset class for building long-term wealth. Rather, its price stability and protections (e.g. the FSCS guarantee) make it useful for short-term goals (e.g. saving for a first mortgage deposit) and keeping an emergency fund.
3-6 months worth of living costs are often sufficient for emergency savings. For instance, if a family of four needs £4,000 to cover their monthly living costs, they might need a £24,000 “rainy day fund”. Beyond that, other assets should be considered for building long-term wealth.
So, the government has a strong case to encourage more people to invest. However, a £4,000 yearly limit on Cash ISAs might not be effective or necessary.
Higher interest rates since late 2021 made Cash ISAs more attractive as savers could get more fixed returns. However, with interest rates starting to fall more recently in 2024-25, more people are likely to be looking for better returns elsewhere.
Preparing your financial plan
The government has not ruled out the idea of a £4,000 Cash ISA limit, and the Chancellor has made some noises suggesting she is considering it. There was no announcement of any changes in the Chancellor’s Spring Statement, only a suggestion that the government is “looking at options for reforms” to ISAs.
Until then, there is still time to make use of your £20,000 ISA allowance if you have not already done so. Remember, any unused allowance is lost when the new tax year starts (6 April).
If you are considering how to best use your ISA allowance, consider getting financial advice to explore your options and align your actions optimally with your personal goals. To discuss your own financial plan, please get in touch to arrange a free, no-commitment consultation with an adviser here in Cumbria.
Your capital is at risk. Investments can go down as well as up. Past performance is not indicative of future results. Tax treatment depends on individual circumstances and may change. Content is for information only and not investment advice. Any decision to invest is the reader’s own. Diversification is key to managing risk. Market volatility affects investment values. Inflation erodes savings. Liquidity risks may prevent quick access to funds.