How might the government change Cash ISAs?

Important information -  the value of investments and the income from them, can go down as well as up, so you may get back less than you invest.

Rumoured changes that would limit the tax breaks on Cash ISAs have been shelved ahead of the government’s Spring Statement this month - but could resurface later this year.

Latest reports suggest Chancellor Rachel Reeves won’t change the rules on ISAs this month but may act at the Autumn Budget later this year.

Calls for reform began to emerge in February with industry figures urging the Treasury to limit ISAs only to investments. The interest on savings held in it is currently tax-free, and adults can contribute as much as £20,000 to Cash ISAs each year if they wish.

Last week, Lord John Lee of Trafford, the first ISA millionaire whose tax-free holdings first reached £1m in 2003, told the Financial Times that the Cash ISA allowance should be halved. And to ensure money makes its way to UK stocks, he said, and not diverted to popular overseas companies like the US tech giants, Stocks and Shares ISAs should be limited to UK-listed companies.

For its part, Fidelity International has called for Cash and Stocks and Shares ISAs to be merged into one single ISA, thereby removing the barrier of having to move money between products or providers when managing savings. It has also proposed capping the Cash ISA element to £4,000.

• Read: What can we expect from the Spring Statement?

What could change?

According to press coverage, industry figures have urged the government to limit ISAs only to investments - via a ‘Stocks and Shares ISA’ - thereby ending Cash ISAs.

A report in the Financial Times suggested the idea had been put to Chancellor Rachel Reeves during a meeting with representatives from the investment industry, who argued the change would help to reinvigorate the UK’s capital markets - a long-term aim of government - by funnelling more of savers cash into assets like shares.

In response, leading building societies - who stand to lose out from the move - have objected, arguing that it would hurt Cash ISA savers and reduce the ability of lenders to issue mortgages and other loans.

Clearly, the removal of Cash ISAs would be very significant and it is possible that less impactful measures are considered - or none at all.  For example, if the scope to save tax-free into a Cash ISA was reduced, the government could expand the Personal Savings Allowance - the sum that you can earn in interest each year before tax is due.

Currently, basic rate taxpayers can earn £1,000 of interest outside an ISA before tax is due. Higher rate payers can earn £500 while Additional rate payers have no Personal Savings Allowance at all.

It could also change the ‘starting rate for savings’ which allows those with other income below £17,570 to earn extra amounts of interest without tax. As much as £5,000 of tax-free interest each year is available for those with other income below £12,570.

Previous suggested changes to the system include applying a limit to the amount that can be held in ISAs. For example, the Resolution Foundation, a think tank, has argued for ISA wealth to be capped at £100,000.

Is it likely to happen?

At the moment, these reports have been driven by interested parties arguing for changes they wish to see - the government has not yet confirmed whether it wants to change anything. Even if it did want to, there’s various reasons to think it would not happen straightaway.

Such reforms are typically announced in the annual Budget. While a ‘Spring Forecast’ is expected from the Chancellor on 26 March, no Budget is expected until the Autumn.

In other areas of the saving system - such as the tax treatment of pensions - the government has announced lengthy reviews and consultations on potential changes. It has not announced immediate changes to rules that would require significant changes to people’s financial plans.

Based on previous experience, changes to tax rules for savings have not been made retrospectively - meaning new rules would apply to money contributed after the rule-change is enacted. Money that is currently sheltered from tax is unlikely to be suddenly exposed to it.

Why might the government change Cash ISAs?

The government has made clear its desire to get the economy growing more quickly, and it has identified the UK’s role as a financial hub in achieving that. It therefore makes some sense to encourage savers to put money held in cash to use in stocks or bonds where it can potentially be more productive. This could also increase domestic demand for shares, adding to the appeal of the UK to companies looking for a market on which to list their shares.

Advocates of scrapping Cash ISAs have argued that no other country incentivises people to park their money in cash.

It also makes sense to encourage more cash savers to invest as a means of improving their own financial prospects in the long-term. That’s because returns from investments have tended to beat returns from cash - as shown below - albeit with the risk of loss along the way.

Finally, there could be an attraction in removing tax-free status from cash interest as a means to raise tax revenue.  

Why might it not change Cash ISAs?

Ending Cash ISAs would be very unpopular with those savers who currently enjoy the tax-free returns they offer. These might include people who do not want to risk losses from investments, and perhaps those in retirement who do not have long time horizons which can help reduce the risk of sudden investment losses.

The government will also be wary of making any changes that adds to the tax advantages of the wealthy.

Which is best - Cash ISA or Stocks & Shares ISA?

Cash and investments both play an important - and different - role in your financial mix. One isn’t inherently better than the other.

It makes sense to hold a sum of cash that you can dip into in an emergency - an amount worth three to six months of income is recommended. Money after that could be considered for investing.

Building some emergency cash first can actually help your investing because it means you are better able to leave investments alone. You won’t have to sell them to produce cash in a pinch at a time not of your choosing. It can also make sense to hold cash on the sidelines that you are willing to use to take advantage of investment buying opportunities as they arise.

Cash will not lose value in nominal terms (although it can lose value to inflation) whereas investments can fall in value.

The compensation for taking that risk is the potential that investments can produce a higher return - with the chance, of course, that they don’t.

• Open a Stocks and Shares ISA

The chart below helps to make the point. It shows the performance of global shares versus assets that produce a cash-like return going all the way back to 1999. While there have been periods when investments have fallen in value and you would have been better off in cash, the long-term outperformance of investments is clear. 

Can you get the best of both?

Under the current rules Cash ISAs and Stocks & Shares ISAs are separate, and moving money between them - where that is possible - requires admin.

An increasingly popular option is to save into cash-like assets via a Stocks & Shares ISA. By investing in assets which produce a cash-like return you’ll achieve a return roughly equivalent to leading cash rates with very little downside risk. At the same time you’ll be ready to switch to investments if and when that suits you.

Cash funds or money market funds held inside investment accounts can do this job. They hold short-term bonds which behave much like cash deposits. The Fidelity Cash Fund is the best-selling cash fund on the Fidelity Investing platform and is forecast to produce 4.96% of income in the coming year - or 4.61% after deducting the Fidelity platform charge of 0.35%. Please note this yield could down or up and is not guaranteed.

You can also earn interest on money held in your investment account even if you don’t invest it into a cash fund. Fidelity offers interest on cash at the rates in the table below. The rates are effective from 1st March 2025. Please note that interest rates can be changed at any time.

• Read more about how and where we hold your cash