Savers in the UK could find themselves restricted further in where they can save money without paying tax, after reports emerged of Rachel Reeves considering cutting the annual limit for Cash ISAs to just £4,000 per year.
Currently, anyone can save a maximum £20,000 per year into Individual Savings Accounts (ISAs), of which there are several types.
You can split money across more than one type - such as a Cash ISA or Stocks and Shares ISA - but there is no rule to say you must use one or the other, with individuals free to determine their risk appetite and put money in accordingly.
However, amid a wider ongoing debate over whether ISAs need reform and whether limits should be imposed on the amount of cash allowed to be held, the Telegraph report Ms Reeves meeting with fund managers and discussing aspects which included limiting Cash ISAs to £4,000 a year - a reduction of 80 per cent from the current limit, if it was maxed out.
Using a Cash ISA rather than a normal savings account shields the interest earned from being liable for tax.
The limit for many individuals in the UK for earned interest without needing to pay any tax at all is £1,000, though this is lower for higher rate earners. Above the threshold, tax is due on interest earned - but not if it is in an ISA.
Bank of England data shows that almost £50bn was deposited into Cash ISAs in 2024, with savers taking advantage of rising interest rates to earn more on their money.
This is important as inflation, which is also on the rise, erodes the value of cash over time meaning people can buy less with the same amount. Money earning money, therefore, preserves its overall value.
However, city executives have been pushing for more of the funds deposited in Cash ISAs to be redeployed in investing plans.
Over the long term, investing in stock markets and other assets which are riskier than cash has shown to provide better returns for peoples’ money. However, there is more risk involved and generally it requires a better understanding from savers of not just where their money goes, but how and when they can access it.
With cash, that process is far more straightforward to understand.
Economic secretary to the Treasury, Emma Reynolds, said the UK had failed to establish “an investment culture”.
Experts have warned that effectively forcing people to invest their money instead of saving it could also disproportionately affect pensioners and older savers, who want safer returns and easier access to their money over a shorter period of time.
Treasury officials told the FT that the Chancellor was “listening to ideas” at this point.
