ISAs are individual savings accounts. There are five types: junior ISAs and four types for adults – cash ISAs, stocks and shares ISAs, innovative finance ISAs, and lifetime ISAs. But junior and lifetime ISAs are distinct from the others, which are interchangeable and into which £20,000 can be saved annually.
Junior ISAs have an annual limit of £9,000 and are for those under 18 while lifetime ISAs are for those under 40 saving for their first residential property purchase and have a £4,000 annual limit, which is part of the £20,000 adult ISA total.
Whether or not cash ISAs should be abolished, a limit placed on how much can be saved in them or their tax treatment changed, is a current hot topic ahead of the end of March statement by the Chancellor. The answer to any of these questions should be no.
Cash ISAs are mentioned in one breath but really there is a need to differentiate between the two parts: cash and ISAs. Why?
The key is that an ISA is a tax-free wrapper that protects one’s savings from tax and to encourage further use of this wrapper.
It’s important to separate the concept of an ISA as a tax-free saving, from the individual products that sit within that wrapper and which provide much choice.
ISAs are like the wrapping or box into which chocolates are placed. They are a tax-free gift from the Chancellor. But just as it is up to you and not the person who gives you the chocolates when you open the box and what you choose inside, neither should the Chancellor fine-tune your holdings inside an ISA.
Just as chocolate makers offer different selections, ISA providers offer variations on these themes – fixed-term or instant-access cash ISAs, stocks and shares ISAs with different risk levels, and so on. You are welcome to mix and match and choose cash, stocks and shares, or other options
UK savings are low, and ISAs work because they encourage saving. ISAs have been a success, with 22.3 million ISA holders and a total market value of £725.9 billion at the end of the 2022-23 tax year, according to the latest data.
Despite success, there are growing calls to restrict the amount that can be placed in cash ISAs because too much money is sitting in cash rather than being invested in stocks and shares. Stocks and shares ISAs account for 59.3% of the total, while cash ISAs made up 40.5%.
At a time when UK tax rates are at historic highs, the benefit of this tax-free wrapper should not be underestimated. ISAs encourage saving by ensuring that people are not taxed twice on their money – once when they earn it, and again when they try to save it.
Cash ISAs have grown in popularity recently, with £49.8 billion flowing into them last year. This is not a surprise given economic uncertainty and with interest rates rising from 0.1% in December 2021 to their peak of 5.25% in August 2023. Now rates are at 4.5%, and look set to fall further, but are likely to settle at a higher level than pre-pandemic. In such a landscape, it is natural that many savers are opting for cash ISAs. The government should not penalise them for this choice.
Nigel Lawson introduced Personal Equity Plans (PEPs) in 1986, John Major introduced Tax-Exempt Special Savings Accounts (TESSAs) in 1991 and Gordon Brown replaced both of these with ISAs in 1999 and their tax-free limits were then raised by George Osborne and again later by Philip Hammond. The earlier versions of saving schemes gave tax advantages favouring stocks and shares and this has led some to call for a return to this, whereas ISAs now provide equal tax treatment regardless of how people choose to save.
The key point is that incentives matter. If the government wants to encourage stock market investment, it should focus on education and transparency rather than limiting choices. Most people stick to what they know when making financial decisions. Just as people tend to pick their favourite chocolates many savers opt for cash ISAs because they are familiar and easy to understand.
Perhaps, just as some people consult the guide inside the box of chocolates, financial education and better information should be seen as key to helping people make their decision and feeling confident about diversifying their choices. The aim is to encourage such investing, not imposing restrictions or penalties that could ultimately discourage saving altogether.
Restricting cash ISAs would also have unintended consequences. People might simply move their cash savings elsewhere, but the tax-free allowances for interest outside of ISAs are extremely low – just £1,000 for basic rate taxpayers, £500 for higher-rate taxpayers, and zero for additional-rate taxpayers.
Some might turn to National Savings & Investments (NS&I) products, like premium bonds, but these are not direct substitutes. Ultimately, capping cash ISAs would do little to drive more investment into stocks and shares and would only create confusion for savers.
In addition, there have been regular calls for an overall cap on ISA holding as high earners benefit the most and the tax-free status of ISAs costs the government revenue. While there is more validity to this than to limiting cash ISAs, it, too, is an approach that is flawed. The government already taxes income when it is earned – should it really be taxing it again when people try to save it? In 2022-23, HMRC would have collected an additional £4.3 billion if ISAs did not exist, but portraying this as a “cost” assumes the government has a right to tax savings in the first place.
Another criticism is that ISAs disproportionately benefit the rich and thus there should be a cap on total ISA savings. In 2016, Rachel Reeves proposed capping total ISA holdings at £500,000. There is no cap currently.
Contrary to claims that ISAs primarily benefit the rich, the typical ISA holder earns between £20,000 and £29,999 per year, with an average ISA value of £31,014 – so just over a year’s salary. In that fiscal year, close to half, 46.2%, saved modest amounts of between £1 and £2,499. Higher earners save more; those earning £150,000 or more hold an average of £96,171 in an ISA.
Rather than penalising savers, the government should focus on encouraging saving across all income levels. While ISA balances vary, the reality is that many people still do not have an ISA at all. Research from the Financial Conduct Authority (FCA) in 2022 found that one in four people in the UK – around 12.9 million – have low financial resilience, meaning they have little or no savings and would struggle to cope with a financial shock. Efforts to boost savings should target this group, rather than restricting those who are already saving responsibly.
Previous schemes aimed at lower-income savers, such as Help to Save, had limited success. This programme offered a 50p government bonus for every £1 saved over four years, with a monthly contribution limit of £50. While well-intentioned, its take-up was low. A more effective scheme could be developed, perhaps offering higher contribution limits or automatic enrolment.
ISAs are about personal savings, not macroeconomic engineering. Some suggest that limiting cash ISAs could help revive the UK stock market, which has struggled in recent years. But if the goal is to attract more investment into British equities, the government should focus on making the UK a more attractive place to invest – by improving listing rules, reducing regulatory burdens, and encouraging pension funds to allocate more to UK stocks. Blaming ISA savers for the stock market’s problems is misguided.
Over the years, governments have encouraged saving for both personal financial security and broader economic benefits. At a macroeconomic level, higher savings mean higher investment, particularly in UK firms. At an individual level, savings is – like choosing chocolates – a personal choice.
Instead of capping ISAs or limiting cash options, policymakers should focus on education, transparency, and incentives that encourage long-term saving. People should be free to decide what works best for them. The government should celebrate the success of ISAs, not meddle with them.
Please note, the value of your investments can go down as well as up.
