Cash ISAs surge on Rachel Reeves allowance crackdown threat

Savers are ploughing money into cash ISAs thanks to the threat of a crackdown on the allowance by Chancellor Rachel Reeves.

Savers piled an extra £2.2 billion into cash ISAs between April and June this year, compared to the year before, according to data from the Bank of England (BoE).

The data, analysed by Moneyfactscompare.co.uk, shows savers put an extra £2.3 billion in cash ISAs in April this year compared to the year before.

The surge suggests people have acted to use their allowances on the back of speculation that Chancellor Rachel Reeves would cut the cash limit from £20,000 to just £4,000. 

Contributions were in fact down in May and June this year as speculation waned on the allowance crackdown. But overall the three-month period still saw a spike in contributions. 

Source: Bank of England Money and Credit data analysed by Moneyfactscompare.co.uk.

Adam French, head of news at Moneyfactscompare.co.uk, explains what has happened and why: “The sharp rise in cash ISA deposits is a clear sign that rumours of ISA reform are influencing saver behaviour. 

“With talk of slashing the annual cash ISA limit from £20,000 to £4,000 people have been rushing to use their allowances while they still can. It’s a textbook example of policy speculation driving real-world financial decisions.”

ISA reform

The Government has been looking at ISA reforms for some time, with parliamentary committees also considering whether the system is up to scratch.

ISAs such as the Lifetime ISA (LISA) have been criticized for issues such as the withdrawal penalty and cap on home purchase levels. 

Rachel Reeves ostensibly said that lowering the cash ISA limit was to encourage more savers to invest their money instead. However, it would also serve the purpose of increasing the Government’s tax take on savings that breach the personal allowance for savings interest.

French explains: “After years of frozen tax allowances and rising interest rates, pushing more savers into paying tax, we’re seeing a scramble for tax efficiency and the prospect of that shield shrinking has understandably caused concern.

“An overhaul of the UK’s ISA system is still on the cards. If the Government’s aim is to nudge more people towards long-term investment, this reaction shows the challenge ahead. 

“You can’t simply cut the cash ISA limit and expect that money to flood into stocks and shares instead. The solution isn’t cutting allowances but greater innovation and shifting focus towards financial education and support.”