Rachel Reeves is reportedly preparing to slash the Cash ISA allowance to £12,000 in tomorrow’s Budget in a move that is supposed to spur investment in the UK stock market.
HMRC data shows that around 15 million adult ISAs were subscribed to in 2023/24, and the large majority were Cash ISAs – just under 10 million.
Around £726bn is held in ISA accounts across the UK, with the majority already in Stocks & Shares ISAs. Only around £100bn is held by people with £20k who only save in Cash ISAs and don’t invest.
The big question here is whether savers will actually choose to use the remainder of their allowance by investing in Stocks and Shares ISAs.
Some will, but it’s likely most will keep it in cash and take the tax hit on the interest. Like most of Reeves’ economic policies, the changes to the Cash ISA allowance are already dead on arrival.
The problem here is a lack of confidence to invest in stocks and generally poor financial literacy in the UK. Slashing the Cash ISA allowance will not solve this.
“We need an investment culture in the UK, and some of the money that has been saved in cash ISAs would work harder for people if it was invested instead, but there’s no evidence that cutting the cash ISA allowance would encourage them to make the change,” said Sarah Coles, head of personal finance, Hargreaves Lansdown.
“There will be people for whom cash ISAs are the most sensible home for their money, especially if they’re saving for the short term, have significant sums of cash and are a higher earner. When HL surveyed clients as to what they would do in the event of a cut, they were equally likely to say a cut in the allowance would mean saving elsewhere as they were to say they would invest instead.
“There will be those who should be investing instead, but the gamechanger here will be changes in the pipeline to allow businesses to provide more targeted support and give people the help they need to take advantage of the enormous growth potential of investment. It’s the carrot that’s going to be effective here: not the stick.”