What a cut to the cash ISA tax-free savings limit could mean for your finances

Rumours that chancellor Rachel Reeves is considering making changes to the tax-free allowance on cash individual savings accounts (ISAs) have resurfaced in recent weeks, ahead of the autumn budget.

Earlier this month, the Financial Times reported that Reeves had revived plans to overhaul cash ISAs in November's budget, in an effort to encourage more people to put more of their savings into UK stocks to help boost economic growth.

According to the report, the chancellor was mulling cutting the amount that people could save tax-free into this type of ISA from £20,000 to £10,000 a year.

However, a group of MPs warned the chancellor against cutting this tax-free limit in a report over the weekend. The treasury select committee cautioned that the potential move would be unlikely to incentivise savers.

It warned that a potential reduction in the allowance could also backfire in other ways. Building societies depend on cash ISA savings as a critical funding source for their mortgage lending, and the committee said if this was reduced, it could mean a less competitive market for financial products and higher prices for consumers.

Read more: What we know about Rachel Reeves' budget so far

In response, Reeves reportedly said: "My understanding is that the report says that changes to ISAs shouldn't be made in isolation of other policies. I'll be setting out any tax changes in the budget in November. And of course we need to get that balance right."

"At the moment, often returns on savings and returns on pensions are lower than in comparable countries around the world, and I do want to make sure that when people put something aside for the future, they get good returns on those savings," she added.

Another option that has been considered by Reeves, according to a separate report by the FT, is requiring stocks and shares ISAs to hold a certain percentage of UK-listed stocks, along with a stamp duty break.

A spokesperson for the treasury had not responded to Yahoo Finance UK's request for comment at the time of writing.

Tom Selby, director of public policy at AJ Bell (AJB.L), said: "Any move to mandate UK allocations within ISAs would be hugely complicated, hike costs for investors and deliver no obvious benefit to anyone.”

"This government was right to kill off the previous administration’s UK ISA proposal and it should disregard any thought of bringing it back to life in a different guise."

'Unneeded level of ISA complexity'

Cash ISAs are the most widely used of the five types of ISA. The other types of ISA are stocks and shares, innovative finance, the lifetime ISA and the junior ISA, which is an account for children aged under 18.

Story Continues

A total of £69.5bn was subscribed to cash ISAs in the 2023/24 tax year, which was up from £41.6bn in the previous tax year, according to annual savings statistics published by HMRC in September.

According to research from personal finance comparison site Finder, released on Tuesday, just 20% of people said that they would invest their money in a stocks and savings ISA if the tax-free limit was cut on cash ISAs and they had extra savings to put elsewhere.

That's according to a survey of 2,000 people in the UK, which was carried out by Censuswide.

Meanwhile, 15% said that they would invest this money outside of an ISA and 16% said that they would invest it in premium bonds.

However, more than a quarter (26%) said that they would save it into a non-ISA savings account and 18% said that there was nothing specific they would do with the money, while 10% said that they would spend it.

Read more: Should Rachel Reeves make changes to the cash ISA allowance? Have your say

George Sweeney, investing expert at Finder, said that "trying to encourage Brits to invest more and get better returns is a commendable end point that I agree with".

"However, I don’t think that cutting the cash ISA allowance paves the way to this result," he added, pointing to Finder's research showing that only 35% would invest their savings.

Sweeney said that a big reason for this was that many people don't feel confident enough about investing.

"Unfortunately, tinkering with the ISA allowance isn’t going to lead to the cultural and behavioural change necessary that would lead to more Brits investing," he said. "Instead, we need better financial education for adults and the younger generation about the possible long-term benefits of investing."

Sweeney said he believed that cutting the tax-free limit would "create another unneeded level of ISA complexity".

Impact on mortgage lending

Another concern is how cutting the ISA tax-free limit could impact the mortgage lending market and the wider economy.

The Building Society Association (BSA) said that nearly two-fifths (39%) of building societies’ £485bn of mortgage lending was in effect funded by the £190bn of deposits held in cash ISA accounts, as of March 2025.

Using modelling, with the input of estimates from former Office for Budget Responsibility (OBR) economists, the BSA said that a substantial cut to limits on cash ISAs could reduce building society mortgage supply by 5%. That worked out to the equivalent of 17,000 fewer mortgages being offered on the property market, according to a base case scenario.

This assumed that the tax-free savings limit would be cut to £5,000 and that 75% of cash ISA deposits that are over the lower limit are put into non-ISA cash savings accounts.

Read more: UK pensioners set for 4.8% boost under triple lock next April

The BSA commissioned the research earlier this summer, when rumours had swirled that the government was considering cutting the tax-free limit for cash ISAs to £5,000 or £4,000.

The association said its modelling showed that if a substantial cut to the cash ISA tax-free limit prompted a sudden switch to investments, so that just 25% of cash ISA deposits were diverted to other cash accounts, then this could lead to 60,000 fewer mortgages on the market.

As a result, the BSA said that this decreased housing market activity "would have a negative impact on economic growth", potentially reducing the UK's gross domestic product (GDP) by £7bn over five years and lowering tax revenues by £2.5bn.

"As such, any tax saving from reducing the cash ISA limits is questionable," the BSA said.

Read more:

December interest rate cut eyed by traders as inflation holds Reeves launches 'one-stop shop' to fast track investment in the UK Stocks to watch this week: Microsoft, Alphabet, Meta, Apple, Amazon and Shell

Download the Yahoo Finance app, available for Apple and Android.

View Comments