Three million UK households could have tax-free allowance ‘halved’ – Birmingham Live

The Chancellor, Rachel Reeves, is being urged to follow through on a proposal to reduce the annual cash ISA tax-free allowance from £20,000 to £10,000. Supporters argue that millions of savers could be better off over time if money above the new threshold is redirected into investments rather than left in cash.

New analysis from investment platform IG suggests that around 2.8 million people currently pay more than £10,000 a year into cash ISAs—roughly a third of all cash ISA holders. The firm claims that lowering the limit could encourage more people to consider stocks and shares ISAs, potentially improving long-term returns compared with holding excess funds in cash.

IG’s UK managing director, Michael Healy, said the UK relies too heavily on cash savings and that cash ISAs do little to support long-term wealth creation. He argued that cutting the allowance to £10,000 would signal a shift toward investing and even suggested that scrapping cash ISAs altogether should be considered. Healy also dismissed warnings from building societies that a reduced allowance would significantly dent deposits or risk the mortgage market, calling such claims scaremongering. He urged the Chancellor to “stick to her guns.”

What the numbers suggest

Using HMRC data, IG estimates that:

• About one in three cash ISA holders—around 2.8 million people—contribute more than £10,000 each year.
• Recent polling indicates that roughly 28% of these savers would consider moving any excess above a £10,000 cap into a stocks and shares ISA.

Combining those figures, IG projects that approximately 784,000 savers could redirect funds into investments, potentially generating an additional £7.2 billion over five years—around £9,100 per person on average.

To model potential outcomes, IG says it applied industry five-year forecasts for UK base rates alongside historical average returns from global markets, comparing the projected performance of cash against stocks and shares ISAs over the same timeframe.

Why the change is being pushed

Proponents argue that while cash ISAs provide tax-free interest and capital security, they may struggle to keep pace with inflation over the long term. By contrast, a diversified investment approach in a stocks and shares ISA can offer higher growth potential, albeit with risk and volatility. The suggested cap is intended to nudge higher-contributing savers toward investing the portion above £10,000.

Concerns and counterpoints

Some in the savings and mortgage sectors warn that reducing the cash ISA allowance could undermine deposits and, by extension, lending capacity. IG disputes this, stating its analysis does not support a significant impact on deposits and calling broader fears about mortgage availability unfounded.

What it could mean for savers

If the allowance is halved, savers who regularly exceed £10,000 in cash ISA contributions may face a choice: keep additional savings in taxable accounts, or move the excess into a stocks and shares ISA within the overall ISA allowance. Whether this results in better outcomes will depend on individual circumstances, time horizons, risk tolerance, and market performance.

While IG’s figures highlight potential gains from investing, markets can go down as well as up, and returns are not guaranteed. Anyone considering changing their approach should review their goals and risk profile and seek guidance if needed.

For now, the debate pits a push for more investment-led saving against concerns over the stability of cash deposits. Backers of the reform describe it as sensible and overdue, while critics caution against unintended consequences. The final decision rests with the Chancellor.