5 reasons not to worry about a reduced Cash ISA allowance

Traditionally there’s a scramble to use tax free ISA allowances before they expire at the end of the tax year. But this year the rush intensified as savers fretted about the possibility of future restrictions on contributions to Cash ISAs.

Those looking to make the most of the £20,000 allowance funnelled £4.2bn into the popular savings product in March 2025, up nearly a third on the previous year, according to Bank of England data. The spike in activity is no doubt partly the result of rumours chancellor Rachel Reeves is looking to curtail the tax-free savings limit with documents accompanying the Spring Statement confirming the Government is considering reforms.

One idea floated last year is a restriction of the Cash ISA allowance to £4,000, with the remainder of the £20,000 limit reserved for Stocks & Shares ISA contributions. At present, individuals can mix and match between the two account types in whatever proportion they wish – or put the whole £20,000 in one or the other.

This still appears to be a credible possibility. Economic secretary to the Treasury Emma Reynolds recently told MPs the government is keen to encourage more people to take up tax-free investing. Although this may disturb some savers that rely on Cash ISAs to protect their savings from tax, there are some good reasons not to be too concerned.

5 reasons savers shouldn’t worry too much

1. Cash may not be a good home for long-term money

The Cash ISA is a very useful product. It allows you to earn interest tax free and can simplify your financial life by keeping that portion of your savings out of tax reporting obligations. However, you can have too much of a good thing. By stuffing money into Cash ISAs and not investing people may be missing out on better opportunities to build long term wealth.

For instance, £100 a month saved into cash since April 1999, when ISAs were introduced, would be worth £38,493. The same amount invested in global shares would have grown to £160,849. Even for a fund aiming to follow the relatively poor performing UK market over the same period would have outperformed cash handsomely at £77,758. Past performance is not a reliable guide to future returns. Source: FE Analytics, to 01/05/2025, total return basis with income reinvested.

There is no alternative to cash for an emergency fund or planned spending. But beyond those needs it often makes sense to invest money for superior returns and a better chance of beating inflation.

2. The Cash ISA will not disappear altogether

There is no suggestion the government will cut Cash ISAs back to the bone. The Treasury document from the Spring Statement stated an ambition to “get the balance right between cash and equities to earn better returns for savers, boost the culture of retail investment, and support the growth mission”.

The goal it seems is to set the allowance at an appropriate level to encourage investing beyond an amount of saving that provides stability and resilience.

It’s also not something likely to be suddenly sprung on savers. No decision has yet been made, and as the new 2025/26 tax year started on 6 April the current £20,000 limit for Cash ISAs is likely to remain until next April. Any changes would require legislation to be passed in parliament and need to be flagged to ISA providers in advance.

A realistic timeline is an announcement on the subject in this year’s Autumn Statement and any changes to take effect from April 2026.

3. Savers also have a savings allowance outside of ISAs

Most taxpayers cash enjoy a certain level of tax-free interest on their savings outside of ISAs. The Personal Savings Allowance lets many people earn up to £1,000 in interest on cash and certain investments each year.

Basic rate taxpayers can earn £1,000 of interest year before paying tax, while higher rate taxpayers have a lower allowance of £500. Additional rate (45%) taxpayers don’t receive any PSA.

There is also a ‘starting rate’ for savings, which is a special 0% rate of income tax for savings income of up to £5,000 for those with taxable income below £17,570. Many lower earners with healthy cash reserves are therefore not necessarily too affected by fresh Cash ISA restrictions.

Finally, there also the possibility of keeping money in Premium Bonds offered by National Savings & Investments. Premium Bonds pay tax-free ‘prizes’ instead of interest, and the returns are literally the luck of the draw. But the more you have in them, up to the limit of £50,000 per person, the more you can expect to get a reasonably consistent cash-like return.

4. There are low risk options in a Stocks and Shares ISA

If Cash ISA contributions do face new restrictions all is not lost for those wishing to take a cautious approach. Those wanting cash-like returns in exchange for a small amount of risk could invest in money market funds or short-dated gilts, both of which are available inside a Stocks & Shares ISA.

A money market fund is an open-ended investment fund that invests in a diversified portfolio of cash deposits and other instruments. Depending on the remit of the individual product, UK money market funds may also include high-quality, shorter-term bonds that pay either a fixed or floating rate of interest. The goal is to produce a competitive cash-like return from the interest received on the investments in the portfolio and to provide short term access for investors.

Meanwhile short-dated bonds, notably gilts which are issued by the UK government, can provide a defined return for investors holding them to redemption – when the capital value is returned to investors. Purchasing a UK gilt that has, say, one or two years to run is a bit like using a fixed term savings product, except the capital value can fluctuate and, depending on the individual gilt, will offer a mixture of income and capital return.

5. ISA transfers may offer some options

To make a Cash ISA restriction effective there would need to be tweaks to the ISA transfer rulebook. Otherwise, people could sneakily open a Stocks & Shares ISA and transfer it to a Cash one right away. At present it is possible to transfer a Stocks & Shares ISA to a Cash ISA, and vice versa.

Nonetheless, individuals who have built up ISA allowances over the years may have flexibility to adapt to any new rules. To ensure they can retain a certain amount in Cash ISAs going forward they could make transfers ahead of any changes being announced or coming into effect.

Cash ISA vs Stocks and Shares ISA

When you save or invest your money, it’s generally best to make use of tax allowances. Individual Savings Accounts – or ISAs – are often a go-to. There are several types, notably Cash ISAs and Stocks & Shares ISAs. What unites them is that any money you make – either as interest on cash or investment income or gains – is free from tax, which helps maximise your long-term returns.

A Cash ISA is effectively a tax-free savings account, like a standard bank or building society account. There are usually similar account options such as a variable interest or a fixed rate for a certain time. Meanwhile, a Stocks & Shares ISA is an investment account that allows you to shelter money from tax and invest in shares, funds, investment trusts and more.

As inflation risks eroding the value of cash over time, Stocks & Shares ISAs could be an alternative to people happy to commit money for the long term and able to tolerate fluctuations in value. Compared to a Cash ISA It will give your money the chance to grow faster than inflation through returns or gains on your investments. However, the value of investments can fall as well as rise. Investors may get back less than invested, especially in the short term.

How does a Stocks & Shares ISA work?