Your Cash ISA tax-free allowance may be reduced

There’s been growing rumours that the government may cut the generous £20,000 annual ISA allowance in the upcoming Autumn Budget – especially when it comes to Cash ISAs.

If that happens, savers could lose out on one of the few remaining ways to earn interest completely tax-free. So if you’re sitting on cash or want to start saving, now could be the moment to act before any changes take effect.

Why would the government cut the ISA allowance?

The £20,000 ISA allowance has remained unchanged since 2017. But recently, reports suggest that Treasury officials are considering reforms, particularly to Cash ISAs, which allow savers to earn interest without paying tax.

There are two main reasons why change might be on the table.

To encourage more people to invest  

The government is keen to channel more capital into UK markets through Stocks and Shares ISAs and pensions, tools that have the potential to deliver higher long-term growth and support the economy.

To save costs 

Every pound held in a Cash ISA means tax revenue lost on interest income. While that’s good for individuals, it limits the government’s ability to collect taxes from higher interest rates.

In short, savers may soon find themselves with less room to grow their money tax-free, unless they act soon.

Cash ISAs still valuable, still underused

Despite lower uptake in recent years, Cash ISAs remain a powerful tool, especially for those building an emergency fund or saving for short or medium term goals. Here are some key benefits.

• Tax-free interest No matter the interest rate, your returns stay untouched.
• No withdrawal penalties Unlike some fixed savings products or pensions, with flexible Cash ISAs your cash remains accessible.
• Split your £20k allowance You can choose how to use your £20k annual allowance, and can split it anyway you like between your Cash ISA and Stocks & Share ISA.

But ISA usage has been falling over the last 15 years. According to HMRC statistics, around 12.4 million Adult ISA accounts were subscribed to in 2022 to 2023, up from 11.8 million in 2021 to 2022. But this is still much lower than the 15 million seen in 2011.

Around two-thirds of subscriptions went into Cash ISAs, with the rest going to Stocks and Shares ISAs or other types (like LISAs).

And the returns? Many savers still leave cash in standard savings accounts or old ISAs, earning very little interest. A lot of the big banks offer less than 2% interest on instant access ISAs and saving accounts, despite inflation and higher central bank rates. It usually pays to shop around and find the best rate for you!

Saving vs investing what UK savers could improve

The UK is a nation of savers, not investors, and that might be holding many of us back.

• According to the ONS, the UK household savings ratio hit 12% at the end of 2024, yet a significant portion of that sits in low-yielding current or savings accounts. Less than a third of UK adults have a Cash ISA.
• Only 16% of UK adults hold a Stocks and Shares ISA, despite the long-term benefits of investing.
• Many savers are missing out on long-term, compounding returns that can be seen with investing. The average long-term return of a diversified investment portfolio is around 5–7% per year, net of fees.

While it comes with more risk, it also brings more growth potential, and the government wants more people to understand and utilise that. With inflation, the buying power of your cash decreases, even when earning interest, so long-term investments could be seen as a way to protect your buying power in the long run.

What you can do now

Until any official changes are announced, the £20,000 ISA allowance still stands (for cash and investments). That means you can put up to £20,000 in a Cash ISA today and lock in your tax-free benefits for the rest of the tax year.

Here’s how to make the most of it.

• Front-load your contributions If you’re in a position to do so, consider topping up your Cash ISA as much as possible now at the start of the tax year to beat any potential changes in the Autumn Budget.
• Mix savings and investing Use your ISA allowance to balance both cash and investment goals. A Stocks and Shares ISA could complement your Cash ISA and help you grow wealth over time.
• Don’t leave money in a standard savings account Even if you’re not ready to invest, moving your money into a high-interest Cash ISA could boost your returns and shelter any interest from tax.

Act now, before it’s too late

Until the government confirms any changes, it’s all speculation. But one thing is clear tax-efficient savings opportunities shouldn’t be taken for granted.

Now is the time to take control. You can take advantage of our latest Cash ISA promotion and make your money work harder. Simply sign up to Moneyfarm, open a Cash ISA, and deposit at least £500 to receive a fixed 0.70% AER boost on top of your standard variable rate for 12 months. It’s a smart way to grow your money, while keeping the flexibility and tax benefits of a Cash ISA. Find out more about how our rates work on the Moneyfarm Cash ISA page. T&Cs apply.