Cash ISA deposits rocket amid fears Rachel Reeves will impose £4,000 limit

Savers rushed to use up their cash ISA allowances in March, amid fears a cut to the amount that can be held in safe haven saving products is imminent.

Those looking to take advantage of the current £20,000 limit on how much cash can be put into an ISA poured £4.2 billion into the accounts – up 31% year-on-year, according to the latest Bank of England Money and Credit data.

This influx follows rumours chancellor Rachel Reeves is poised to bring down the axe on the cash ISA limit – potentially to as low as £4,000 – in a bid to get more Brits investing in UK companies via stocks and shares ISAs instead.

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Laura Suter, director of personal finance at AJ Bell, says: “There’s usually a spike in people stuffing their ISAs before the tax year end, but the speculation around changes to ISAs put the rockets under that this year.

“The money paid into cash ISAs was 31% higher than March last year, with an extra £1 billion paid in by the British public.”

Savers paying into their cash ISAs are likely to have got some good deals, as interest rates on the accounts rose around tax year end, despite expectations of a falling Bank of England base rate.

Data from Moneyfacts showed that at the end of March this year, easy-access ISA rates were higher than in April last year, although fixed rate ISA accounts were paying less.

However, while the top rates on offer have risen, the average cash ISA rate has been dropping, according to Bank of England data. The easy-access rate peaked in October 2023 at 3.4% and fell to 2% in March.

Suter says: “It means that cash savers need to be savvy to hunt out the best rates, using comparison sites to pick an account with a top rate, rather than defaulting to their bank’s cash ISA account.

“If savers don’t shop around they may well be losing out by plumping for an ISA rather than a standard taxable savings account, despite the free ride on tax.”

Will Rachel Reeves cut cash ISA limit to £4,000?

Speculation about a specific cash ISA limit first emerged in early 2025, when it was reported that Rachel Reeves was being lobbied by some figures in the City to create a £4,000 annual cash ISA allowance. Currently, the overall ISA allowance – which applies to all types of ISA – is £20,000.

Cash ISA reform appears to be on the cards in the near future, with economic secretary to the Treasury Emma Reynolds telling MPs that the government is keen to encourage more people towards tax-free investing.

However, there is no guarantee that a £4,000 limit is what is being explored by the Treasury.

While changes to the cash ISA in the Spring Statement failed to materialise, the Treasury document did state that the government is reviewing ISA options to “get the balance right between cash and equities to earn better returns for savers, boost the culture of retail investment, and support the growth mission”.

Reynolds told the Treasury Select Committee inquiry last week (23 April) that the government is interested in “boosting the culture of retail investment”.

She said: “We will be looking at the advantages and perhaps downsides of all the different ISAs alongside our primary objective to improve living standards through better economic growth.

“We know there are many people putting cash aside who could consider and might consider investing in stocks and shares…but perhaps lack the confidence.”

Research by AJ Bell shows savers are paying the price for staying with safe havens, as cash ISAs have lagged the returns of stock market funds since the ISA was launched in April 1999.

The figures show that £1,000 saved every year in a cash ISA since April 1999 when the product was launched, and earning the average cash ISA rate over that almost 26-year period, would have turned into £34,392.

However, if that same £1,000 a year was invested in the average return of the IA Global sector it would have turned the £26,000 investment into £83,603.

On 2 April, chancellor Rachel Reeves told the Treasury Select Committee that she thinks reforming the cash ISA would be “worthwhile”, stating: “That’s what we’re [the Treasury] looking at at the moment.”

While Reeves said she does “recognise the importance of cash for a lot of people,” she justified possible reform because “already, you can save in a savings account and some of that is tax-free, the interest on that is tax-free, and also we have got the ISA limits”.

Could a £4,000 cash ISA limit help the UK stock market?

Campaigners have suggested a £4,000 annual cash ISA limit would encourage more people to put their yearly tax-free ISA allowance into a stocks and shares ISA in a bid to boost investment in UK equities.

This boost would be welcome as the UK stock market remains unloved compared to its peers in the US and many companies are even favouring the New York Stock Exchange over London.

When questioned over the potential allowance cut in February, Reeves said: “It’s really important that we support people to save to achieve their aspirations.

“At the moment, there is a £20,000 limit on what you can put into either cash or equities [ISAs], but we want to get that balance right.

“I do want to create more of a culture in the UK of retail investing like what you have in the US, to earn better returns for savers.”

When could cash ISAs be reformed?

There has been no official confirmation that cash ISAs will be changed, and both Reynolds and Reeves have declined to provide a timeline.

As the new tax year started on 6 April, the full £20,000 cash ISA allowance is likely to stay in place for the 2025/26 year as any changes to the nature of the cash ISA would require legislation to be passed in parliament.

Reeves has previously stated that she is committed to only one large fiscal event a year as a way to maintain stability in the economy and the markets. This large event is the Autumn Budget, usually held in late October or early November.

With knowledge that it would take a long time to pass ISA reform through parliament, and that such a reform would likely be announced at the Autumn Budget, it seems likely that if a concrete decision is made to reform the cash ISA, it would be announced in this Autumn.

The pros and cons of a cash ISA

Higher interest rates have made cash ISAs more attractive in recent years. Savers get the security of fixed return and it is tax-free.

But they could lose their appeal as interest rates continue to drop. They also may struggle to beat inflation, unlike investing in the stock market.

Even without an ISA, savers benefit from a personal savings allowance at £1,000 per year for basic rate taxpayers and £500 for higher earners.

Research by Quilter suggests many savers are losing money in real terms by keeping funds in a cash ISA.

Someone who invested £10,000 in a cash ISA in December 2012 would currently have £11,955. Adjusted for inflation, this is just £7,918, according to research by the wealth manager.

In contrast, a £10,000 investment in the IA Global Equity index over the same period would be worth £33,526 or £22,221 after inflation.

Holly Tomlinson, financial planner at Quilter, said: “Following a relatively rare period of cash ISAs delivering above inflation returns, we are now back to people losing money in real terms by keeping their money in cash.”

Tomlinson said scrapping or scaling back cash ISAs to try to shift the UK’s savings culture towards investment is “not necessarily a bad thing as too much wealth sits in low-yielding cash when long-term investing could deliver better returns and fuel economic growth”.

She added: “While this data shows cash ISAs are not the best place to save to get the best returns, these types of accounts still have their place. Your saving goal might be in the short-term meaning you can’t take on the inherent risk that comes with investing.”

Rob Morgan, chief investment analyst at Charles Stanley, said many people hold too much in cash and not enough in investments, which is a “missed opportunity to drive long term wealth creation".

He added: “This reticence has negative ramifications for the success of the UK stock market and the wider economy too.

“While cash is exactly what is needed for building short term financial resilience through an emergency fund and saving for shorter term goals, it fails to drive household wealth meaningfully forward over the longer term.”

If cash ISAs were axed or limited in some way in favour of stocks and shares ISAs, Morgan suggests those wanting cash-like returns in exchange for little risk could mitigate the move by investing in areas such as short-dated gilts or money market funds.

He added: “That would require some level of knowledge, or perhaps advice or guidance, to achieve the desired objectives, but it could undermine the objective of incentivising greater long-term investment in the stock market specifically."

Tomlinson suggests the approach to the cash ISA should be reform, not removal.

She said: “Capping tax-free cash savings or improving incentives for investment ISAs could strike the right balance. The UK does need to boost its investment culture, but that shouldn’t come at the expense of savers who rely on cash for stability.”