Chancellor Rachel Reeves is reportedly feeling the heat to either scrap or reduce the cash ISA tax-free savings allowance. Right now, over 18 million individuals have a cash ISA, with nearly £300 billion tucked away in them.
Last week, Emma Reynolds, Economic Secretary to the Treasury, made a push for investments to be channelled into the stock market instead, to boost economic growth. There are different kinds of ISAs – cash ISAs earn interest on savings, while stocks and shares ISAs depend on the stock market’s performance.
Ms Reynolds queried during a House of Lords committee meeting: “Why do we have hundreds of billions of pounds in cash Isas? … What can we do together in parliament about trying to drive an investment culture that realises cash is not a good investment, especially in a high-inflation environment? ” But there’s opposition, highlighting the significance of cash ISAs as crucial funding sources for banks and building societies. Robin Fieth, the Chief Executive of the Building Societies Association, commented: “Cash ISAs help consumers to achieve their savings goals. They play an integral role in the UK savings market and have done for many decades. They represent a policy success upon which we should seek to build, rather than to curb.”
So, what’s at stake with an ISA?
Savers are currently able to stash away up to £20,000 every tax year into an ISA account, with the interest earned remaining tax-free. This benefit has become increasingly significant as savings rates have improved, allowing individuals to earn a certain amount of interest before being taxed, reports the Mirror.
Basic-rate taxpayers have a personal savings allowance of £1,000 per tax year, while higher-rate taxpayers have a £500 allowance; additional rate taxpayers, however, do not receive any allowance. Interest tax kicks in once earnings surpass these thresholds.
Amidst rumours that cash ISAs may be on the chopping block, no official changes have been confirmed. Martin Lewis, the founder of MoneySavingExpert.com, has advised savers to carry on as usual.
In a recent tweet, he clarified: “There is no news, there’s lots of speculation written up as news, but absolutely zilch has been announced. In fact I doubt anything has been decided yet (though it is being discussed).”
Lewis also addressed concerns about withdrawing money from ISAs, stating: “To those asking should I take money out of ISAs. If there are changes it will almost certainly (nothings 100%) be on how much you can contribute in future. It would be very unlikely to impact any money already in cash ISAs. So don’t do any panic moves, just keep going, nothing has happened.”
A Treasury spokesperson, in comments to The Mirror, remained tight-lipped about potential changes to cash ISAs, stating: “We want to help people save for their future goals and build greater financial resilience across the country. We keep all aspects of savings policy under review.”
When it comes to alternatives to cash ISAs, currently, the leading cash ISA offers a higher return than the best standard easy-access saving accounts. These easy-access accounts generally permit withdrawals at any time, though some may restrict the number of withdrawals within a certain timeframe.
The highest cash ISA rate at present is 5.03% from Trading 212, outpacing the top rate for standard easy-access accounts, which stands at 4.85% from Coventry Building Society. Regular saving accounts can offer even better rates, but typically cap the amount you can deposit monthly.
For instance, Principality Building Society provides an 8% fixed rate for six months on up to £200 per month.
Fixed-rate accounts usually lock in your money for the duration of the term, making them less suitable for those who might need quick access to their funds. Currently, the most competitive rate is a 4.66% one-year fix from SmartSave.
