Chancellor reportedly considering a reduction to the £20,000 annual savings limit
Chancellor Rachel Reeves has stated that she wants to ensure “the right balance” on cash ISA deposit limits amid reports that the government is considering cutting the annual limit from £20,000 to just £4,000.
The move is reportedly being explored as part of wider efforts to encourage retail investment in stocks and shares, rather than cash savings, which the government argues provide lower returns for savers and limit investment in the economy.
Encouraging investment over savings
Reeves met with senior City executives earlier this week to discuss strategies for increasing retail investment. Following these discussions, The Daily Telegraph reported that she is considering slashing the current cash ISA limit, which has been set at £20,000 since 2017.
Asked about the potential cap during a media interview on Thursday, the Chancellor 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 United States, to earn better returns for savers.”
In the UK, savers currently have access to two main types of ISAs: cash ISAs and stocks and shares ISAs. While cash ISAs allow tax-free savings, they typically offer lower returns than investments in equities. Stocks and shares ISAs, by contrast, allow savers to invest in the financial markets, with potentially higher, albeit riskier, returns.
Backlash from the financial sector
The reported proposal to cut the cash ISA limit has sparked significant backlash from financial institutions and industry experts, who argue that it could deter saving and negatively impact economic stability.
Tom Selby, Director of Public Policy at investment firm AJ Bell, criticised the idea, telling the PA News Agency:
“It is hard to imagine an ISA system that does not let investors hold a significant chunk of their savings in cash. Reducing the limit may seem superficially attractive, but there is no guarantee this money would then be deployed in long-term investments.”
Savings providers have also expressed concerns about the knock-on effects of reducing cash ISA limits. The Building Societies Association (BSA) has previously warned that such a move could have unintended economic consequences, including restricting banks’ ability to lend and pushing up mortgage rates.
Banks and building societies use cash ISA deposits to fund loans for households and businesses. A significant reduction in deposits flowing into these accounts could reduce available lending capital, potentially making borrowing more expensive for consumers and businesses alike.
Debate over the role of cash ISAs
The discussion around limiting cash ISAs comes amid broader debates within government over how to encourage investment and economic growth. Emma Reynolds, the Economic Secretary to the Treasury, recently questioned the UK’s preference for cash savings over investments, stating in a House of Lords committee meeting:
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“Why do we have hundreds of billions of pounds in cash ISAs? The UK needs an investment culture that realises cash is not a good investment.”
While cash savings offer security, they often fail to keep up with inflation, meaning their real value diminishes over time. In contrast, long-term investment in stocks and shares has historically provided better returns, albeit with higher risks.
Concerns over savers’ financial security
Despite government efforts to promote investment, many savers prefer the security of cash ISAs, particularly in times of economic uncertainty. With over 18 million people holding cash ISAs and around £300 billion stored in these accounts, any change to the system could have significant consequences.
Critics argue that pushing savers towards riskier investments could leave many exposed to financial losses, particularly those nearing retirement who rely on cash savings for security. Others highlight that not everyone has the financial knowledge or confidence to invest in stocks and shares, making cash ISAs an essential savings tool for millions of people.
Looking ahead
With the Chancellor remaining tight-lipped on whether she will formally introduce a cut to cash ISA limits, the debate is expected to continue in the coming months. While the government seeks to shift the culture towards investment, opposition from financial institutions and consumer advocates may complicate any attempts to implement sweeping changes.
For now, savers and investors alike will be watching closely to see whether Reeves pushes ahead with her reported plans—or if public and industry pressure forces her to reconsider.
