Cash ISAs could see significant changes as speculation grows that the UK government may reduce the annual deposit limit from £20,000 to £4,000. According to Express.co.uk, Chancellor Rachel Reeves is expected to address the future of Cash ISAs in her Spring Statement on March 26.
The proposed changes, reportedly backed by some financial institutions, aim to encourage more savers to invest in stocks and shares ISAs rather than keeping cash in low-risk savings accounts. However, banks, building societies, and consumer advocates have warned that restricting Cash ISAs could harm long-term savers and reduce funding for loans to households and businesses.
Why Is the Government Considering a Cash ISA Cap?
Currently, Cash ISAs allow individuals to save up to £20,000 a year tax-free, shielding their interest from HMRC taxation. However, some policymakers argue that these funds are sitting idle instead of stimulating economic growth.
Chancellor Rachel Reeves has hinted at her desire to shift savings habits:
“I do want to create more of a culture in the UK of retail investing like what you have in the United States, to earn better returns for savers.”
At present, workers earning under £50,270 can earn up to £1,000 in savings interest tax-free, while those earning over £50,270 have their allowance cut to £500. High earners above £125,000 get no tax-free allowance at all. With interest rates at 5%, many savers quickly exceed these thresholds, making tax-free Cash ISAs an attractive option.
Pushback Against the £4,000 Cap
Despite government discussions, financial institutions and consumer groups are urging the government to keep Cash ISAs unchanged.
The Building Societies Association (BSA) has called on Rachel Reeves to protect Cash ISAs, emphasizing their role in funding loans for households and businesses. In an open letter, BSA chief executive Robin Fieth stated:
“Cash ISAs are a long-established cornerstone of the UK savings landscape, that are well understood and upon which many people rely.”
He also dismissed claims that Cash ISAs fail to support economic growth, pointing out that banks use these deposits to fund mortgages and business loans.
What Savers Should Do Now
With the March 26 announcement approaching, financial experts are urging savers to act quickly if they are considering opening or maxing out their Cash ISA allowance before any potential changes take effect.
Hargreaves Lansdown advised:
“Rumours are circulating that Rachel Reeves could cut Cash ISAs in the Spring Statement. If you’re planning to open a Cash ISA this year, it’s best to act now, rather than leave it to the last minute.”
While the Treasury has not confirmed any final decisions, it has stated that “all aspects of savings are being kept under review.” The coming weeks will be crucial in determining whether the £4,000 cap proposal becomes official policy or is scrapped following industry opposition.
