It is being reported that the Chancellor Rachel Reeves, is preparing to announce a significant cut to the annual tax-free Cash ISA allowance, a move aimed at encouraging savers to shift their money from low-yield cash savings into higher-return investments in UK-listed companies. This proposal, expected to be unveiled in Reeves’ Mansion House speech in mid-July 2025, represents the most substantial reform to the ISA system since its inception in 1999.
What is the Current Situation?
Currently, UK savers can put up to £20,000 per tax year into an ISA, which can be split between different types: Cash ISAs, Stocks and Shares ISAs, Innovative Finance ISAs, and Lifetime ISAs. Importantly, the £20,000 limit applies across all ISA types combined, and savers can allocate the full amount into cash if they choose.
Cash ISAs are popular because they offer tax-free interest on savings without risk to capital, making them attractive for cautious savers. However, the returns on cash are generally lower than those from investing in stocks and shares over the long term.
What is the Proposed Change?
The government plans to reduce the maximum amount that can be held in Cash ISAs, potentially cutting the allowance from £20,000 down to somewhere between £4,000 and £5,000 per year, while maintaining the overall £20,000 ISA limit. This means savers would have to allocate more of their ISA allowance to stocks and shares or other investment vehicles to use the full £20,000 tax-free allowance.
The Treasury’s goal is to redirect the estimated £300 billion held in cash ISAs into UK equities, thereby providing a much-needed capital injection to London-listed companies and revitalizing the UK’s capital markets, which have suffered from a lack of investment and company flotations in recent years.
Rationale Behind the Change
Advocates argue that cash ISAs, while safe, offer limited returns that may not keep pace with inflation or provide adequate growth over time. Encouraging savers to invest in stocks and shares ISAs could improve their long-term returns and support the UK economy by channeling funds into businesses that need capital.
Charles Hall, a supporter of ISA reform, stated that addressing Cash ISA limits “makes sense” to encourage savers toward higher-return products and ensure taxpayer money incentivizes investment in UK companies.
Opposition and Concerns
The proposal has faced strong opposition from various financial institutions and savings groups. Critics argue that cutting the Cash ISA allowance could harm savers who rely on cash ISAs for safe, accessible savings, especially those who are risk-averse or saving for short-term goals like weddings or house purchases.
Michael Summergill, CEO of investment platform AJ Bell, expressed fundamental opposition, warning that reducing the cash ISA limit would negatively impact savers without significantly increasing investment in equities. AJ Bell’s research found that only about 25% of savers would redirect additional funds into UK equities if the cash ISA limit were cut.
Sarah Coles of Hargreaves Lansdown highlighted that cash ISAs often serve as a gateway product for new savers, who gradually move into investments as their confidence grows. She cautioned that a blunt cut could reduce overall investment uptake, advocating instead for a “carrot, not stick” approach that addresses behavioural barriers to investing through education and encouragement.
Potential Impact on Savers
If the Cash ISA allowance is cut to around £4,000 or £5,000, savers wanting to contribute more tax-free to cash savings would have to look elsewhere. Alternatives like regular savings accounts could expose them to Income Tax on interest exceeding the Personal Savings Allowance, which varies by taxpayer status (£1,000 for basic-rate, £500 for higher-rate, and none for additional-rate taxpayers).
Martin Lewis, founder of MoneySavingExpert.com, warned that while the change would not affect existing ISA balances, it could limit future tax-free cash savings. He also expressed scepticism about the policy’s effectiveness, arguing that cash savings and stock market investments serve fundamentally different needs and that better financial education would be a more effective way to increase investment.
Government Position and Next Steps
Chancellor Rachel Reeves has made clear she does not intend to reduce the overall £20,000 ISA limit, but she has left open the possibility of cutting the cash component specifically. The government is reportedly weighing options to strike a balance between encouraging investment and protecting savers’ interests.
The proposed changes are expected to be part of a broader “financial services growth and competitiveness strategy” to be announced alongside the Mansion House speech. The Treasury is also considering reforms to improve financial advice and guidance, helping savers make informed decisions about investing.
The value of your investments and pensions (and any income from them) can go down as well as up which would have an impact on the level of benefits available
The information contained within this article is based on our understanding of legislation, whether proposed or in force, and market practice at the time of writing. Levels, bases and reliefs from taxation may be subject to change.
The content in this article was correct on 1st July 2025
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