What are Isas and how much money can you save in them?
An Isa is a savings or investment product treated differently for tax purposes. There are cash Isas and stocks and shares Isas. These are offered by various banks, building societies, investment firms, and other financial providers.
Any returns made from an Isa are tax-free, but there is an annual limit on how much money can be deposited. Currently, the allowance is £20,000 per year, which can be allocated to one account or spread across multiple Isa products as desired.
Isas do not close automatically at the end of the tax year. When a new tax year begins, savers can open a new Isa or, in some cases, continue adding money to existing accounts.
To open an Isa, one must be at least 18 years old and either live in the UK, be a member of the armed forces, or be a Crown servant working abroad.
How are cash Isa rules changing?
In the Budget, Chancellor Rachel Reeves announced that the annual tax-free allowance for cash Isas will be reduced from £20,000 to £12,000 for individuals under 65 years of age. This change will take effect in April 2027.
The government aims to
"ensure people's hard-earned savings are delivering the best returns and driving more investment into the UK economy". Plans include encouraging savers with large balances to invest in stocks and shares instead of cash savings.
To support this, there will be advertising campaigns reminiscent of the 1980s "Tell Sid" campaign, which promoted investment in the newly privatised British Gas. Additionally, banks will send targeted messages to customers holding funds in low-interest accounts.
The Chancellor confirmed that those aged 65 and over will retain the ability to save up to £20,000 in cash Isas. The annual tax-free allowance for stocks and shares Isas will remain at £20,000.
What is the difference between cash Isas and stocks and shares Isas?
Cash Isas are typically offered by banks or building societies and operate similarly to standard savings accounts. Savers deposit money and earn interest on their balance.
With regular savings accounts, interest above certain thresholds is subject to income tax. Basic rate taxpayers can earn up to £1,000 in savings interest annually tax-free, while higher rate taxpayers have a £500 allowance. Additional rate taxpayers pay tax on all savings income, and low-income individuals may receive additional allowances.
In contrast, interest earned within a cash Isa is tax-free regardless of the amount or the saver’s income level. Cash Isas are widely popular, with millions of savers holding billions of pounds in these accounts.
Stocks and shares Isas function similarly but instead of holding money in a savings account, funds are invested in company shares, unit trusts, investment funds, or bonds. Returns from these investments are protected from income tax and capital gains tax.
While stocks and shares Isas can offer higher returns, they also carry greater risk. The value of investments can fluctuate, meaning the amount invested can decrease as well as increase.
What other types of Isa are available?
Junior Isas allow young people to save, or for parents to save on their behalf, until the child reaches 18, at which point they can access regular Isas.
Lifetime Isas (Lisas) are designed to help individuals save towards a first home deposit or retirement. Savers can contribute up to £4,000 annually, with the government adding a 25% bonus. However, the government announced plans to replace Lisas, citing criticisms that the rules are too restrictive and that some savers have been affected by property price limits.
Innovative Finance Isas permit investment in alternative financial arrangements such as peer-to-peer loans, bypassing traditional banks.
Why does the government want to encourage personal investing?
The government believes that promoting investment in stocks and shares could benefit British companies and stimulate economic growth.
Many investment companies that offer stocks and shares Isas support this initiative, while banks and building societies, which dominate the cash Isa market, are more cautious.
Proponents argue that billions of pounds currently held in savings accounts are not being actively invested and that redirecting these funds could benefit both savers and the broader economy.
They advocate reforms to encourage personal investing.
Opponents contend there is little evidence that reducing cash Isa attractiveness will lead to increased stocks and shares Isa uptake. They warn that some people might stop saving altogether or incur higher taxes on money held outside Isa accounts.
Building societies have highlighted that a reduction in cash Isa deposits could decrease the funds available for lending as mortgages or other loans, potentially increasing borrowing costs.
