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.

**UPDATE** What can we expect from the Autumn Budget?

The government has put a potential cut to the Cash ISA allowance on hold, according to reports, with officials promising to consult with industry before deciding any reform to the tax-free accounts.

The government had been expected to announce a cut in the amount cash savers can hold in tax-free ISAs at the annual Mansion House address next week. Now that plan has been shelved, with the Financial Times reporting ‘differing views’ within government about how to proceed. The change remains on the table, however, with officials due to consult further with the savings industry.

Chancellor Rachel Reeves has previously discussed changes to ISAs, confirming in May that she wants UK savers to put more of their money into the stock market. While she has said that she does not want to reduce the overall £20,000 annual allowance for ISA savings, officials have left open the possibility of reducing the amount that can be allocated to cash. Currently, individuals can split their £20,000 allowance between different types of ISA and contribute the whole amount to either cash or investments if they wish.

Speaking in May, the Chancellor said: “I’m not going to reduce the limit on what people can put into an ISA but I do want people to get better returns on their savings, whether that’s in a pension or their day-to-day savings. At the moment, a lot of money is put into cash or bonds when it could be invested in equities, in stock markets, and earn a better return for people.”

What could change?

The government is considering a reduction in the allowances for cash ISA savings while maintaining the overall £20,000 ISA limit. 

If the government is serious about redirecting saver’s Cash ISA money into assets like stock and bonds, where the benefit to the economy overall is potentially higher, then other new rules may be also required to specify what investments will qualify to be held in ISAs.

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. 

Other changes could happen to reduce the impact of limiting tax-free cash savings. For example, 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 in this position. 

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 - and when? 

While any imminent change to ISAs is off the table, officials have promised to consult further before making a decision on any changes to ISAs. If they were to happen, such reforms are typically announced in the Budget, which is due in the Autumn, but it may take longer for a consultation to take place.

Based on previous experience, changes to tax rules for savings have not been made retrospectively - meaning new rules would apply only 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? 

It 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. 

Additionally, the government has made clear its desire to get the economy growing more quickly and 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 limiting Cash ISAs have argued that no other country incentivises people to park their money in cash.

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

Why the government might 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. 

Traditional Cash ISA providers, including building societies, have strongly objected to the rumoured changes. They have argued that cutting the Cash ISA allowance will reduce deposits that helps support mortgage lending.

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. 

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 4.5% of income in the coming year - or 4.15% after deducting the Fidelity platform charge of 0.35%. Please note this yield could go 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 July 2025. Please note that interest rates can be changed at any time. 

Account

Gross rate of annual interest

Annual Equivalent Rate (AER)

ISA (including Junior ISA)

2.65%

2.65%

Investment Account

2.65%

2.68%

Cash Management Account

2.65%

2.68%

SIPP (including Junior SIPP)

2.75%

3.78%

If you’ve got a burning question you want to ask, why not drop us a line. Ask us your question

Important information - investors should note that the views expressed may no longer be current and may have already been acted upon. There is a risk that the issuers of bonds may not be able to repay the money they have borrowed or make interest payments. When interest rates rise, bonds may fall in value. Rising interest rates may cause the value of your investment to fall. Eligibility to invest in an ISA and tax treatment depends on personal circumstances and all tax rules may change in the future. Withdrawals from a pension product will not be possible until you reach age 55 (57 from 2028). An investment in a money market fund is different from an investment in deposits, as the principal invested in an money market fund is capable of fluctuation. Fidelity’s money market funds do not rely on external support for guaranteeing the liquidity of the money market funds or stabilising the NAV per unit or share. An investment in a money market fund is not guaranteed.This information is not a personal recommendation for any particular investment. If you are unsure about the suitability of an investment you should speak to one of Fidelity’s advisers or an authorised financial adviser of your choice. .

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