Cash ISA subscriptions surge - but will the chancellor cap ISA benefits in the Budget?

Savers are racing to open a cash ISA before 30 October to guard against any nasty tax surprises in chancellor Rachel Reeves's maiden Budget.

According to a survey by the investment platform Hargreaves Lansdown, one in five people (19%) had opened a cash ISA or were planning to ahead of the Budget. It's the most common step taken due to tax rise rumours in the Budget.

This is closely followed by putting money in a stocks and shares ISA (18%).

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Meanwhile, the investment platform Interactive Investor has seen the number of customers maxing out the £20,000 annual ISA allowance rocket 65% from the start of July to the end of September, compared to the same period last year.

There has been frenzied speculation about what the chancellor could announce this Wednesday, in what Labour have repeatedly described as a "painful Budget". This includes raising capital gains tax and slashing pensions tax-free cash to imposing a "double death tax".

Sarah Coles, head of personal finance at Hargreaves Lansdown, comments: “People aren’t taking Budget threats lying down. They have the chance to make changes ahead of the announcement that will help protect them from any tax threats that might be lying in wait.

"Opening a cash ISA has seen the biggest uplift ahead of the Budget. This is reflected in the take-up of the HL cash ISA – which has seen the number of people saving so far this tax year more than double compared to the same period a year earlier."

She also reported that the number of people maxing out their Hargreaves junior ISA this tax year was up 51%, while clients maxing out their HL lifetime ISA had jumped 28%.

The popularity of cash ISAs has surged in recent years. The number of cash ISAs that had money paid into them in 2022/23 jumped 11% compared to the previous year, as savers affected by frozen tax thresholds and rising interest rates sought to shelter their savings from tax.

In total, 7.9 million cash ISAs were subscribed to, according to the latest HMRC data. In 2021/22, the figure was 7.1 million. In contrast, the number of stocks and shares ISAs subscribed to fell slightly from 3.9 million to 3.8 million.

Overall, 12.5 million adult ISAs had money paid into them during 2022/23, up from 11.8 million in 2021/22.

Adam Thrower, head of savings at Shawbrook, comments: “ISAs are seeing a surge in popularity, with smart savers waking up to the fact that making their money work harder is more important than ever.”

Frozen income tax bands mean that more and more savers are liable to pay income tax on their savings interest. Almost 2.1 million people are expected to pay tax on their savings this year, according to a freedom of information request from the investment platform AJ Bell.

We dig further into the HMRC data to highlight key ISA trends as well as the possibility of any ISA changes in this week's Autumn Budget.

A bias for cash ISAs – and a gender gap

The lure of higher savings rates has led to more savers squirrelling money away in their cash ISAs. While cash ISAs have always been more popular than their stocks and shares counterparts, the share of cash ISAs as part of the overall total rose for the first time in several years, reaching 63.1% in 2022/23.

Ed Monk, associate director at Fidelity International, notes: “As interest rates climbed steadily - from 0.25% in January 2022 to a peak of 5.25% by August 2023 - savers continued to funnel money into cash. Bank of England data revealed a record £9 billion deposited into cash ISAs in April 2023 alone.”

However, with inflation proving stubborn and interest rates falling, he warns that now is a good time for savers and investors to reassess their balance of cash and investments.

“Investing means you run the risk of losses, so should only be undertaken by those comfortable with that risk. But, the long-term record of investments suggests they have had a better success rate in beating inflation than cash. Investing, even in small amounts, can help mitigate the effects of inflation over the long term, opening the possibility of higher returns and protecting your financial future,” says Monk.

The HMRC data also reveals a gender disparity. Despite holding 51.8% of all ISAs, women hold only 42.6% of stocks and shares ISAs.

“This stark gender gap in investing means women risk missing out on the potential growth opportunities that come from investing in the stock market,” comments Monk.

Lifetime ISAs and junior ISAs

A total of 56,900 people used their lifetime ISA (LISA) to purchase their first home in 2023/24. However, 99,650 people made unauthorised withdrawals during the same period and were hit with a withdrawal penalty.

The value of LISA withdrawal charges reached a massive £75 million in 2023/24, a 30% increase compared to the previous year.

Rachael Griffin, tax and financial planning expert at the wealth manager Quilter, comments: “These concerning figures illustrate just how many people continue to face a difficult battle over the need to save for the future versus the need to pay their bills, and higher costs have clearly won as so many have had to stomach the 25% charge to gain access to their money.”

She says the punitive lifetime ISA penalty needs to be reformed - “at the very least, dropping the 25% penalty to 20%” - a plea echoed by many other personal finance experts.

Meanwhile, more than 1.25 million junior ISAs had money paid into them in 2022/23, up from 1.21 million the year before. About 42% of the junior accounts were cash ISAs. The average subscription in 2022/2023 remained relatively steady at £1,220.

The Hargreaves Lansdown survey found that the fourth most common move ahead of the Budget was to pay into a junior ISA for a family member.

Could we see any changes to ISAs in the Budget?

Following prime minister Keir Starmer’s warning of a “painful” Budget with “those with the broadest shoulders bearing the heavier burden”, savers and investors are bracing themselves for tax hikes and the removal of certain tax breaks.

Coles says that while "there haven’t been any rumours around tax on savings, people aren’t prepared to take any chances", and are opening or topping up ISAs "while they know where they stand".

However, according to the accountants BDO, ISAs could easily be a target in the Autumn Budget. Elsa Littlewood, private wealth tax partner at BDO, says that the latest figures show that ISAs are costing the Exchequer almost £5 billion a year in tax relief.

“Cutting this cost by reining in ISA benefits for wealthy investors might be seen as an easy way to help balance the books.”

She adds: “It’s not impossible that the chancellor could seek to impose a lifetime cap on ISA saving – perhaps set at around £500,000. If this were to happen, we would hope that the limit would be indexed to rise in line with inflation.

“We could also see a reduction in the annual allowance available for cash ISAs, but an increase in the annual allowance for stocks and shares ISAs in an effort to support economic growth.”