Why reforms to cash ISAs are a bad idea

The Chancellor is expected to make major changes to Individual Savings Accounts (ISAs), including cash ISAs, later this year.

Rachel Reeves has come under pressure to limit the amount that can be placed in cash ISAs with some reports suggesting this could be as little as £4,000.

She said this will be to encourage more savers to invest instead – boosting UK growth.

But not everyone thinks changing the way ISAs work is a good idea.

Gerard Lyons, Chief Economic Strategist at Netwealth and former advisor to Boris Johnson, said: “ISAs should be easy to understand and use and be kept as simple, fair and effective.

“Instead of capping ISAs or limiting the options, policy should focus on education, transparency, and incentives to encourage people to save more, for the long-term. People should be encouraged to take advantage of the tax-free wrapper and be free to decide what works best for them.

“The Government should celebrate the success of ISAs, build on this and be careful about meddling with them.”

Below, Mr Lyons outlines the things he believes the Chancellor should bear in mind before making any changes.

• The government should be promoting ISAs as a way to raise savings further and should think twice before they tinker with them. ISAs have been a great success, with 22.3mn people holding them. The latest data shows that they were worth £725.9bn at the end of the 2022-23 tax year. ISAs work because they encourage saving. This is critical for the economy, as savings are low.

• An ISA is a tax-free wrapper that protects savings from tax and further use of this wrapper should be encouraged. The simplest outcome would be to have just one ISA and leave the choice about everything else up to the individual. Currently Junior and Lifetime ISAs are distinct from other types of ISAs. It’s important to separate the concept of an ISA as a tax-free saving, from the individual products that sits inside that wrapper and which provides much choice. Cash ISAs are mentioned in one breath but really there is a need to differentiate between the two parts: cash and ISAs. It is up to you what investments you want inside an ISA and when you might want to swap things around between cash and other investments – and ISA providers should ensure that it is easy to do so. ISAs encourage saving by ensuring that people are not taxed twice on their money – once when they earn it, and again when they try to save it.
• Do not abolish, limit or change the tax treatment of cash ISAs. The Chancellor has come under pressure to change cash ISAs, as the hope is that this may encourage more money into stocks and shares. In the recent economic climate, it is natural that many savers have opted for cash ISAs. The Government should not penalise them for this choice. As interest rates fall and if confidence improves, cash holdings in ISAs may decline naturally. If cash savings in ISAs were capped, some might turn to National Savings & Investments products, like premium bonds, but these are not direct substitutes. Ultimately, capping cash savings in ISAs would do little to drive more investment into stocks and shares and may only create confusion for savers.
• There is little to be gained from an overall cap on ISA holdings. Contrary to claims that ISAs primarily benefit the very rich, the typical ISA holder earns between £20,000 and £29,999 per year, with an average ISA value of £31,014 – so just over a year’s salary. In 2022-23, HMRC would have collected an additional £4.3bn if ISAs did not exist, but portraying this as a “cost” assumes the Government has a right to tax savings in the first place. It is important to see this tax treatment as achieving a wider economic goal of boosting savings.
• Rather than penalising savers, the Government should focus on encouraging saving across all income levels. A more effective scheme than Help to Save, which had limited take-up, could be developed, perhaps offering higher contribution limits or automatic enrolment. While ISA balances vary, the reality is that many people still do not have an ISA at all.  The Financial Conduct Authority in 2022 found that one in four people in the UK – around 12.9mn – have low financial resilience, meaning they have little or no savings and would struggle to cope with a financial shock. Efforts to boost savings should target this group, rather than restricting those who are already saving responsibly.
• Blaming ISA savers for the stock market’s problems is misguided. Some suggest that limiting cash ISAs could help revive the UK stock market, which has struggled in recent years. But if the goal is to attract more investment into British equities, the Government should focus on making the UK a more attractive place to invest – by improving listing rules, reducing regulatory burdens, and encouraging pension funds to allocate more to UK stocks.
• If the Government wants to encourage stock market investment, it should focus on financial education. This might drive a greater understanding of the flexibilities inherent within an ISA rather than limiting choices.  The aim is to encourage such investing, not imposing restrictions or penalties that could ultimately discourage saving altogether.