How to earn over 4% on your cash… using a stocks and shares ISA
Savers worried about a potential cut to the cash ISA limit in the Autumn Budget could shield their money from the taxman using a money market fund or other assets in a stocks and shares ISA. We explain how
The prospect of cuts to the Cash ISA allowance could leave the most cautious of savers unsure of where to put their money but there are low risk alternatives.
Chancellor Rachel Reeves is said to be considering cutting the cash ISA allowance in the Autumn Budget tomorrow (26 November)npossibly to £12,000 or by halving it to £10,000. Currently, savers can put up to £20,000 into a cash ISA each tax year, and earn interest tax-free.
There were previously rumours that Reeves would slash the cash ISA limit in her Mansion House speech back in July, potentially to as low as £4,000. But she reportedly changed her mind after heavy lobbying from building societies, who warned that such a move could push up mortgage rates.
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The rumours have returned ahead of the Autumn Budget and any reductions mean savers may have to pay tax on some or all of the interest on future savings.
This may already be having an impact on investor behaviour, with Investment Association (IA) data showing rising inflows into funds that provide cash-like returns at the expense of equity funds.
However, you may not need to worry too much about a reduced cash ISA allowance. That’s because it is possible to generate tax-free, cash-like returns without a cash ISA.
Here are some alternatives to cash ISAs for cautious savers and investors that can be held in a stocks and shares tax wrapper.
Money market funds?
The closest you may get to cash on the markets is money market funds.
These invest in short-term debt such as bank deposits, government loans and corporate loans. Fund managers will select a mixture of different investments to manage the money on your behalf, aiming to preserve your money while giving a cash-like return.
The main risks are that the returns may not beat inflation and you would most probably do better with an equity fund over the long-term.
Money market funds saw inflows of £524 million in September, according to the latest IA data.
You can buy a money market fund within a stocks and shares ISA. Many of these funds are currently paying an income of more than 4%, or even 5%.
Mark Burges Watson, co-founder of the money app Kaldi, told MoneyWeek: “If the chancellor cuts the cash ISA allowance, many savers will be left wondering what to do with the rest of their overall tax-free ISA allowance – especially if they’re not comfortable taking on stock market risk. But there’s a solution that few people are talking about: money market funds.”
The funds have become popular with investors since interest rates rose, after years of low returns. And now they’re enjoying another moment in the spotlight as rumours swirl of a cash ISA limit cut.
Indeed, money market funds are some of the best-selling funds on Fidelity’s platform this year. Last month, a trio – Royal London Short Term Money Market Fund, Legal & General Cash Trust and Fidelity Cash Fund – were among the top 10 most popular funds.
At Interactive Investor, the most popular active open-ended fund is Royal London Short Term Money Market – which has also topped the list of its most-bought funds for nine months in a row.
Andrew Prosser, head of investments at InvestEngine, said: "A money market fund is typically made up of short-term debt from governments, banks and companies with strong balance sheets and investment-grade credit ratings.This means they offer relatively stable, if slightly lower, returns compared to other types of investments. But most importantly, any returns invested through an ISA are tax-free.
"With interest rates still at 4%, these types of funds are becoming more popular and can be seen as a substitute for a savings account. Savers can invest in money market funds through their stocks and shares ISA – and they can, if they wish, hold their entire £20,000 annual allowance in just one fund.”
Is there another way to invest in cash using a stocks and shares ISA?
Most investment platforms allow customers to “park” their money in cash before deciding where to invest.
So, if you’re a new investor wondering how to allocate your money, you could leave it in cash earning interest while you decide.
Interest rates vary a lot, as our investigation into interest rates on investment platform cash balances reveals.
Some pay just 1% or 2%, while others, like AJ Bell’s Dodl ISA pay more (currently 4.06%). Bestinvest and Trading 212 also tend to pay competitive rates of interest.
Other alternatives include bonds, which let investors essentially loan money to governments or companies and provide a fixed rate of return.
You can invest directly in bonds or a fund manager can build a diversified portfolio for you.
The latest IA figures show there were £818 million of inflows into fixed income funds in September 2025.
The returns are more or less guaranteed unless the government or company goes bust. Plus there is no capital gains tax when you invest in government bonds, known as gilts.
But the returns will typically be lower than equities and may not beat inflation.
Laura Suter, director of personal finance at AJ Bell, added: “It’s worth remembering that bond funds can move up and down in value. If markets start to think interest rates will rise (or not be cut as fast as previously expected), bond prices usually fall. So, while they’re generally lower risk than shares, they’re not risk-free.
“That said, bonds can play an important role in smoothing out the bumps in your portfolio. Government bonds in particular often move in the opposite direction to shares, which can help balance things out when stock markets are volatile. There are lots of flavours of bond funds to choose from. Some stick mainly to government bonds, while others focus on corporate bonds issued by companies. Strategic bond funds have more freedom to move around the market and pick where they see the best opportunities.
Treasury bills or T-bills, which sit between cash savings and traditional bonds, can also be held in a stocks and shares ISA.
These are short-term loans to the the UK government, backed by the state, and the main risk is that the government defaults.
The loans are typically for one, three or six months but rather than paying interest, they’re sold at a discount and repaid at face value. So, if you buy a £1,000 T-bill for £980, you’ll receive £1,000 when it matures, with the £20 difference being your return.
Suter added: “T-bill rates don’t have a fixed return like a bank account. Instead, the price you pay for them is determined at weekly government auctions. Investors submit bids, and the final rate depends on demand at that auction. That means you won’t know the exact return until after your bid is accepted – but in a high-interest-rate environment, recent yields have remained competitive.
“However, one thing to note is that once you’ve bought one, your money is locked in until maturity – there’s no early exit. Unlike other government bonds or shares, you can’t sell them on a secondary market. This works in a similar way to fixed-rate savings accounts.”
Cautious investors may also benefit from a multi-asset fund
Your money is spread between different asset classes such as bonds and shares to give a diversified portfolio. Investors can opt for different risk levels of these funds to suit their needs, with the lower risk end of the spectrum investing more in bonds, money market options, cash and cash alternatives.
Inflows into mixed asset funds rose from £180 million in August to £264 million in September, the IA said.
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Ruth is an award-winning financial journalist with more than 15 years' experience of working on national newspapers, websites and specialist magazines.
She is passionate about helping people feel more confident about their finances. She was previously editor of Times Money Mentor, and prior to that was deputy Money editor at The Sunday Times.
A multi-award winning journalist, Ruth started her career on a pensions magazine at the FT Group, and has also worked at Money Observer and Money Advice Service.
Outside of work, she is a mum to two young children, while also serving as a magistrate and an NHS volunteer.
- Marc Shoffman Contributing editor