Cash ISAs: why it could be your last chance to grab 5% tax-free savings

Cash ISAs are currently at the centre of a media storm, as rumours have been swirling that chancellor Rachel Reeves is thinking about stripping the popular savings vehicle of its tax benefits (see our separate piece on Reeves’s cash ISA raid).

It could be the wake-up call that some savers need to use up their £20,000 annual ISA allowance before 5 April, which will reset at the end of the tax year.

Rumoured tax reforms aren’t the only risk on the horizon. The savings rates on cash ISAs have also been falling in recent months, and are expected to fall further over the course of the year.

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On 6 February, the Bank of England cut the base rate for the third time since the summer, and around three more cuts are expected this year.

With this in mind, now could be your last change to grab a 5% interest rate on tax-free savings, with the market-leading cash ISA currently offering 5.03% AER.

By acting quickly and putting some money in a one or two-year fixed-rate cash ISA, you could potentially lock these returns in for longer, avoiding a double-whammy of interest rate cuts and tax reforms.

Data from investment platform Hargreaves Lansdown suggests some savers have been taking advantage of the window of opportunity already. So far this month, savers have opened more cash ISAs than regular savings accounts via the platform.

“This doesn’t usually happen until mid-March, as we get closer to the tax year end, but the trend has kicked off already in February,” said Mark Hicks, head of active savings at Hargreaves Lansdown.

Open a cash ISA now before interest rates fall further

Even if the rumoured tax changes come to nothing, savers would be wise to take advantage of higher savings rates while they last.

Although they remain high compared to their long-term history, cash ISA rates have fallen over the past year – firstly in anticipation of base rate cuts and now in response to them.

The average rate on an easy-access cash ISA today is 3.04% (13 February 2025), down from 3.34% on the same day one year ago.

The market-leading easy-access cash ISA still offers 5.03% AER (including a 0.13% bonus for 12 months), but it is unclear how long these sorts of deals will stick around.

Most economists are now predicting one rate cut per quarter from the Bank of England, bringing the base rate to 3.75% by the end of the year.

With this in mind, savers could be better off opting for a fixed-rate account to lock in a guaranteed rate for a set period of time, if they are sure they won't need access to the money in the interim.

The top one and two-year fixed-rate accounts currently offer 4.42% and 4.31% respectively, for savers looking for an account with no initial opening limit.

Those with more to invest may be able to find an even more lucrative deal. For example, Caitlyn Eastell, spokesperson at comparison site Moneyfacts, highlights Hodge Bank’s two-year fixed-rate cash ISA as one of her top picks.

Although Hodge Bank has reduced its rate slightly this week, “the account maintains its position as the market-leader, paying 4.41% on its anniversary,” Eastell says. It has a minimum opening amount of £1,000.

Will Reeves scrap the tax benefits of cash ISAs?

For now, the rumoured changes are just speculation driven by reports that big city firms have been urging the chancellor to reduce tax breaks for cash savers – part of an attempt to drive investment into the UK stock market instead.

However, the Treasury chose to neither confirm nor deny the matter when MoneyWeek asked it to comment earlier this week, instead saying that it “keep[s] all aspects of savings policy under review”.

In practice, there are several ways the government could reduce the tax benefits of cash ISAs, from cutting the annual allowance to scrapping the product entirely.

Any restrictions are likely to prove unpopular. More than 18 million people have a cash ISA, and over £294 billion was held in this type of account at the end of the 2022/23 tax year, according to the latest statistics from HMRC (published in September 2024).

Data from the Bank of England also shows that 2024 was a record year for cash ISAs, with savers depositing over £49.8 billion, up from the previous record of £47.1 billion in 2023.

The popularity of cash ISAs could mean they end up becoming a victim of their own success, however, with the savings vehicle having caught the attention of government ministers as well as city firms.

Emma Reynolds, the economic secretary to the Treasury, recently questioned the sense behind hoarding billions of pounds in cash ISAs. “We have failed to drive an investment culture that we see in other places that allows people to invest their money,” she said.

The stock market almost always beats cash returns over the long run, provided savers invest sensibly in a diversified mix of companies. However, for many savers, it isn’t an 'either-or' situation when it comes to cash versus stocks and shares ISAs.

A cash ISA is often appropriate for short-term savings goals, while a stocks and shares ISA can be used as a tool for building longer-term wealth.