CASH ISA CHANGES SPARK SURGE IN DEMAND – WHAT IS BEST OPTION FOR SAVERS

Savers have moved to put money into cash ISAs following reports that Rachel Reeves is set to announce a cut to the tax-free limit.

On Monday, it was widely reported that the Chancellor is expected to announce a reduction in the annual tax-free cash ISA allowance from the current £20,000 ceiling in her Mansion House speech next week.

Unlike typical savings accounts, cash ISAs allow savers to earn interest on their money and avoid paying tax on what they make.

Cash ISA provider Plum told The i Paper it had seen a 69 per cent increase in deposits in cash ISAs in the first three days of this week compared to the first three days of last week, as savers act to beat any change in terms.

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It said this was partly down to it offering a strong rate on its ISA, but was also likely due to speculation.

Leeds Building Society, another provider, said it had seen a 32 per cent increase in account openings on Monday to Wednesday this week compared to the previous week.

Rajan Lakhani, head of money at Plum, said: “There is no doubt that the speculation about cash ISA reforms will be causing many savers unrest, who are naturally taking an opportunity now to max out their cash ISA before any changes are introduced.”

Brian Byrnes, head of personal finance at Moneybox, another provider, said: “We’ve seen a clear uplift in Cash ISA activity over the past week, with deposits up 39 per cent and new account openings rising by 27 per cent compared to the previous week. While we can’t directly link this to speculation around ISA reform, the data suggests that many savers may be acting now to make the most of their tax-free allowance while they can.”

Other providers have said that the number of savers pushing to open a cash ISA has increased longer term too.

Hargreaves Lansdown said that over the last year 100,000 people had opened up a cash ISA with the company, compared with 43,000 in the previous twelve months.

Mark Hicks, head of active savings at Hargreaves Lansdown, said: “Cash ISA season continues to last even longer with cash ISA rates offering greater returns than regular savings accounts.

“Given all the debate around the cash ISA, we can expect savers to be just as keen to take advantage of this year’s allowance in the coming months.”

There has been continued speculation that the Chancellor will trim back the amount that can be saved in the popular savings accounts, perhaps to as low as £4,000.

The move is under consideration in order to encourage tax-free investing in stocks and shares, and thus help boost the UK’s economy.

Growing the economy is a key plank of the Government’s agenda, and crucial if it is to keep to its spending hopes, as well as its promise to the electorate that it will put more money in people’s pockets.

But the economy has been sluggish over the past year, leaving the Chancellor with little room to manoeuvre.

People can usually put £20,000 a year into different types of ISAs, with an alternative being a stocks and shares ISA, where cash is invested and the returns are free of tax.

Critics argue, however, that cautious savers would be reluctant to shift from secure but lower-yield ISAs to the stocks and shares where the returns are less guaranteed.

The Treasury has said that it is looking at options to reform ISAs. Earlier this year, Reeves told the BBC: “I’m not going to reduce the £20,000 ISA limit, but I do want people to get better returns on their savings, whether that’s in a pension or in their day-to-day savings.

“And 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. But I absolutely want to preserve that £20,000 tax-free investment that people can make every year.”

Should you put money into a cash ISA now?

It is unclear when any change to the cash ISA allowance would begin, but experts suggest it would likely be at the start of the next tax year, in April, rather than immediately.

This means that there is probably no need to rush to put your money into one immediately.

Tom Selby, director of public policy at AJ Bell, said it probably “wouldn’t be workable” to introduce a new limit partway through a tax year, as many people would already have exceeded the cash ISA limit.

However, a cash ISA can be a good option for savers, and it is worth comparing rates before doing so.

With a usual savings account, basic rate taxpayers pay 20 per cent tax on interest earned over £1,000 per year, while higher rate payers pay 40 per cent on interest earned over £500, and additional rate taxpayers pay 45 per cent on all their interest.

With a cash ISA, you do not pay any tax on the returns.

The best cash ISA rate on the market, from Trading 212, pays 4.98 per cent for a year, and there are multiple fixed rate options of over 4 per cent.

This is generally better than a normal savings account, with the best typical savings account from Atom Bank paying a rate of just 4.75 per cent.

An alternative is getting a stocks and shares ISA. This can result in better returns, but there is a chance you could lose money too. It is only recommended that you get one of these if you are prepared to keep your money stashed away over the long term – for five years or more.

2025-07-04T14:04:10Z