Is Rachel Reeves set to cut the Cash ISA allowance?

Earlier this year, the government was rumoured to be considering a cut to the amount savers can add to Cash ISAs with banks, building societies and cash savings accounts. 

Currently you can contribute up to £20,000 each tax year across both Cash ISAs and Stocks & Shares ISAs in any proportion, and you don’t have to pay tax on the interest, dividends or capital gains.

It was rumoured that policymakers were looking to limit the cash component to encourage more people to invest, particularly in the UK stock market. Now, reports suggest these plans are being dusted off for a Budget announcement, which could halve the Cash ISA limit from £20,000 to £10,000.

The change (if it goes ahead) is unlikely to take effect right away and we expect the Cash ISA allowance will be unchanged for the current tax year (2025/26). However, Rachel Reeves could conceivably cut the Cash ISA limit from next tax year –  starting 6th April 2026.

Is there a case for a UK Cash ISA allowance reduction?

Cash ISAs are an important and popular product, especially with tax thresholds staying frozen and interest rates considerably higher than a few years ago. Everyone needs a pot for a rainy day, and a Cash ISA is a simple way to build one tax-free. Yet there’s now around £300bn sitting in these accounts, some of which could arguably be better directed towards other assets for the long term. 

Lots of people hold too much in cash savings and not enough in investments, which is a missed opportunity to drive wealth creation. This reticence has negative ramifications for the success of the UK stock market and the wider economy too. 

While cash is essential for building short-term financial resilience for unexpected events and any planned spending such as house renovations or holidays, it fails to drive household wealth meaningfully forward over the longer term. Investing in the stock market and other assets doesn’t offer immediate security of capital, and you could get back less than you invest. That said, over long periods – five to ten years or more – leaving too much in cash could end up being more damaging to your wealth than taking risks with investments, even though it’s a bumpy ride at times. That’s because cash typically struggles to significantly outpace inflation. 

Find out more: Should I save or invest?

Today, savers are benefiting from high headline returns compared with a few years back, as well as improved digital methods of moving money around. But they shouldn’t ignore the basic principle that keeping too much in cash can be counterproductive in the longer run. 

Directing more money into Stocks & Shares ISAs could also be an opportunity to revive the UK stock market, which is suffering from a lack of investor interest and a dearth of new companies coming to market through initial public offerings (IPOs). The Chancellor has previously said she’s not looking to reduce the overall £20,000 ISA allowance, so any move could provide a fillip to the UK market depending on whether she also chooses to alter the eligibility criteria for ISA investments.

Is there a precedent for different Stocks & Shares and Cash ISA limits?

A two tier, tax-free system for cash and investments isn’t without precedent. Today you can split the £20,000 overall annual ISA allowance whichever way you like. But in the early years of ISAs, there was the choice of contributing to a ‘Mini’ Cash ISA and ‘Mini’ Stocks & Shares ISA, with limits of £3,000 each, or up to £7,000 in a ‘Maxi’ Stocks & Shares ISA. The tax-free allowance was therefore £1,000 larger for those wishing to allocate to shares.

Further back in time there were two separate products, Personal Equity Plans (PEPs) for investments and Tax-Exempt Special Savings Accounts (TESSAs) for cash. Again the principle being that you could use one or the other, or both – thereby incentivising those with a decent amount in savings to invest.

Although these rules were a bit complex, they did achieve the policy goal of nudging people into long-term investing while still offering savers a smaller tax-free environment. This could be the sort of balance between cash and investments the Chancellor looks to strike going forward with her ISA reform. 

However, she must also consider how to make the ISA system simple and easy to navigate for consumers. At the moment, there’s a tangled web of different ISA types, which is a barrier for people to engage constructively with their savings and investments.

Could people get around a more restrictive Cash ISA allowance?

Depending on the eventual rules, if Cash ISAs were limited in some way, then those wanting cash-like returns in exchange for little risk may be able to mitigate the move by investing in areas such as short-dated government bonds (gilts) or money market funds in a Stocks & Shares ISA – assuming these remain eligible investments. That would require some level of knowledge, or perhaps advice or guidance to achieve the desired objectives, but it’s a possible work around for people happy to take a modicum of risk.

Plus, with Charles Stanley Direct’s Flexible ISA you can even withdraw and replace your money during the tax year without it affecting your ISA allowance.

Find out more: 5 reasons not to worry about a reduced Cash ISA allowance

How to follow the Autumn Budget

Budget season can bring uncertainty for individuals, families, and business owners alike. We understand how important it is to stay informed – and we’re here to help you cut through the noise and make sense of any changes announced.

Stay ahead of the curve by visiting our Budget Insights page for latest updates and expert analysis.