Cash ISA rules latest: Could your £20,000 allowance be cut?

After months of speculation, the Chancellor’s Spring Statement initially appeared silent on rumoured ISA reforms. However, the accompanying ‘red book’ documents confirmed government plans to overhaul the system.

It said there were plans “to get the balance right between cash and equities and to earn better returns for savers, boost the culture of retail investment, and support the growth mission”. Rachel Reeves is reported to have said in a recent Treasury Select Committee meeting that ISA reform would be ‘worthwhile’ but shouldn’t be rushed.

So, what do we know so far, and what do the experts think will happen?

What’s on this page?

1. Why are there plans to change ISAs?
2. What might happen to ISA allowances?
3. Would ISA reform work?
4. A call for simplicity
5. What should savers do now?

Why are there plans to change ISAs?

The idea is that ISA reform would encourage more UK savers to invest in stocks and shares ISAs. In theory, this would help people achieve better returns on their savings and help more of us remain financially independent in later life.

It could also support the UK economy if that cash was channelled into British stocks instead. A recent study by Barclays highlights this ‘investment gap’. It found that there are 13 million Brits who already have six months’ income set aside for emergencies, who hold a further £33,000 each (on average) in cash that might be better invested.

And according to AJ Bell’s analysis of government figures, over 4.4 million adults have more than £10,000 in a cash ISA but don’t invest and 3 million have over £20,000 without having any stocks and shares ISA investments. AJ Bell says: “At a conservative estimate, those 3 million savers hold almost £100 billion in cash ISA accounts but no ISA investments.”

The changes are widely expected to focus on cash ISAs, which remain far more popular than stocks and shares ISAs. Government figures show that 63.2% of all ISAs subscribed to in 2022/23 were cash ISAs.

What might happen to ISA allowances?

The most likely change would be to cut the cash ISA allowance, as was speculated in the run-up to the Spring Statement. Currently, savers can pay up to £20,000 a year into a cash ISA. Reports have suggested this could fall to £4,000, but no formal proposal has been made yet.

HMRC figures show that two-thirds (67%) of those paying only into a cash ISA contribute less than £5,000 a year. And just 10% use the maximum £20,000 allowance. But that could still mean that a third of ISA savers would be affected by a change to a £4,000 limit, and it’s not clear how many of those would be willing to invest instead.

A cut in the allowance could make it harder for older savers to shelter income-generating cash from tax, and for those approaching retirement, cash ISAs remain a vital part of their financial planning. It would also punish those who simply do not want to invest in the stock market.

Another more radical option is that cash ISAs could be phased out completely. This was rumoured at the start of the year and caused an immediate uproar, partly because building societies rely heavily on cash ISA deposits to fund their mortgage lending.

Given their importance as the bedrock of the British mortgage market, it seems unlikely cash ISAs will disappear completely.

Would ISA reform work?

Research from AJ Bell also suggests that changing cash ISA allowances may not work as intended. Over half of cash ISA savers surveyed by the investment platform said they would simply move their money into a taxable savings account and only a fifth would invest in UK stocks.

Tom Selby, director of public policy at AJ Bell, says: “Our research suggests the blunt tool of restricting cash allowances may not be effective, as most people will simply look for alternative cash products.”

There is also a view that reforming ISAs in this way would be regressive. Jason Hollands, managing director of Bestinvest, says: “While it is undoubtedly true that too many people keep excess savings in cash and could be missing out on the higher long-term returns that can be achieved from investing, anything that reduces choice and flexibility is a step backward.”

A call for simplicity

The experts we spoke to argued that instead of imposing additional restrictions, reform should focus on simplifying ISAs.

Selby says: “The ISA has been a fantastically successful product in part because of its simplicity, but successive governments haven’t been able to resist tinkering and adding new versions, which risks undermining that success and confusing potential investors. Bringing in separate allowances would also make ISAs more complicated when the goal needs to be simplification.”

He adds: “Combining the main ISAs into a single product, alongside targeted support reforms to improve the guidance potential investors receive, can be the foundation of the retail investing shift the chancellor wants to see.”

Simplifying the ISA family would also help encourage people to embrace the tax-free savings benefits of all these accounts.

Sarah Coles, head of personal finance at Hargreaves Lansdown, says: “Dropping the ‘stocks and shares’ language and updating the ISA to call it an investment ISA would be a welcome victory for plain speaking.” She adds: “A review of the products which can be held within an ISA would also allow for the government to consider how current investment trends can be supported.”

Rachel Springall, finance expert at Moneyfactscompare.co.uk, points out that there is also the opportunity to offer more financial incentives for investors. “One way that the government could encourage saving into a stocks and shares ISA would be to offer a short-term government bonus for investing in UK stocks, such as they currently offer on lifetime ISAs [which offers a 25% bonus, worth up to £1,000 a year],” she says.

What should savers do now?

Whatever changes eventually materialise, it’s widely expected that existing ISA balances will remain protected under their original terms. So there’s no need to panic. Instead, use the uncertainty as an incentive to shield your cash from the taxman while you still can.

And with interest rates still relatively high and ISA allowances reset by the new tax year, it’s a good time to sort out your savings. “Given reform is in the air, make the most of the ISA allowances you have now,” advises Selby.

“That’s always a good idea if you can afford to, regardless of potential reforms, as your ISA allowance is available on a ‘use it or lose it’ basis each tax year.”