Cash ISA limit to be cut?

If you’ve kept your eye on the news recently, you may have spotted stories that the Cash ISA limit may be cut.

Currently, you’re allowed to put up to £20,000 per year into an ISA (Individual Savings Account). You can invest all or part of this amount in one or any combination of the following types of ISA:

• Cash ISA
• Stocks and shares ISA
• Innovative finance ISA

Currently, it’s speculated that the Chancellor, Rachel Reeves, wants to cut the maximum amount you can pay into a cash ISA each year to £4,000. Speaking recently, she said: “At the moment, there is a £20,000 limit on what you can put into either cash or equities, but we want to get that balance right.”

Why cut the cash ISA limit?

People in the UK currently hold £726 billion in ISAs. Of that, £294 billion is in cash. Recently, lobbyists from the City have tried to persuade the Chancellor to cut the cash ISA limit. The thinking is that, if more money is diverted into stocks and shares ISAs, it could have a positive impact on the economy.

Will changing the limits work?

On paper, it’s easy to see the rationale behind cutting the cap on what you can invest in cash ISAs. If the annual allowance for ISAs remains at £20,000, with a maximum of £4,000 in a cash ISA, then that leaves up to £16,000 that could go in a stocks and shares ISA.

That just leaves the question of whether people will put the remaining money in an investment ISA, or do something else with it. Carol Knight of the Investing and Saving Alliance is sceptical. She argues that stocks and shares ISAs have significant barriers. These include a lack of confidence in them and a perception that the risk of investing is too high. As a result, she believes many people will instead invest the extra money in other cash products.

If this happens, the gains Rachel Reeves sees for the economy will be seriously diluted. That’s why Carol Knight instead suggests better education for savers about the benefits of long term investing.

Should I put money in a cash ISA now?

Given that the rules haven’t yet changed, there’s nothing to stop you putting up to £20,000 in a cash ISA now (assuming you have your full allowance left for this financial year). Whether that’s a wise move depends on a number of factors. First of all, most people have an annual personal savings allowance of £1,000 (although this can differ). This means that they can earn up to £1,000 in interest per year without having to pay tax on it. So, if you only have a limited amount to save, it’s quite possible that you could find a normal savings account that would give you better returns than a cash ISA – and still not pay tax on the interest.

If you are likely to earn significant amounts of interest, the chances are that you’d benefit from independent financial advice. Depending on your circumstances, stocks and shares ISAs may be a good long term prospect, as could other investments. It really depends on how much money you want to save and / or invest, what your goals are, and what your appetite for risk is.

As for whether the Chancellor will cap the amount you can save in a cash ISA, who knows? It’s certainly looking very possible. For that reason, now may be a good time to get professional tax planning advice.