Cash Isa holders cost the Treasury a total of £2.1bn in tax relief in the year to April 2024, up from £70mn in 2021-22, new data reveals.
Rising interest rates have boosted earnings on cash Isa holders’ deposits, meaning more savings are benefiting from tax protection, according to figures released under a freedom of information request by AJ Bell, the investment platform.
Since 2017, holders can deposit up to £20,000 annually across all their Isa accounts — including cash Isas, stocks-and-shares Isas and lifetime Isas — without paying tax on interest, capital gains, or dividend income.
Cash Isas, by far the most popular type, became a more attractive option for savers as banks raised their savings rates from rock-bottom lows as the Bank of England lifted its base rate.
The total held in cash Isas was £346bn in March 2024, a fifth higher compared with £289bn in March 2022, Bank of England statistics show.
On non-Isa savings, basic-rate taxpayers can earn up to £1,000 in interest tax-free, while higher-rate taxpayers have a lower personal savings allowance of £500. Additional rate taxpayers receive no allowance. But with tax thresholds remaining frozen from 2021, growing numbers of people are exceeding these limits and paying tax on their savings interest.
“Isas have never been more valuable to savers and investors as these figures clearly demonstrate,” said Laith Khalaf, head of investment analysis at AJ Bell. “Rising interest rates have left many people on the hook for tax on their savings interest, but those who have sheltered their money in a cash Isa collectively saved themselves over £2bn in tax in the last tax year.”
Rising stock markets also lifted the total tax relief for stocks-and-shares Isas, which hit 5.6bn last year, up a third from 2021.
The Financial Times reported in January that some City firms had urged chancellor Rachel Reeves to limit the amount held in a tax-free cash Isa to encourage more money into underperforming UK stocks. However, any reforms are expected to be held back until after next week’s the Spring Statement.
“Although UK funds haven’t been popular in recent years, Isa holders still have pretty chunky holdings in the UK,” said Khalaf. “There is an economic benefit to UK companies because it ultimately helps to lower their cost of capital.”
The gulf in potential gains is underscored by new HMRC data released under a separate freedom of information request by budgeting app Plum. It showed that the UK’s top stocks-and-shares Isa investors have built pots worth more than 13 times the size of the largest cash Isas.
The average value of the top 25 stocks-and-shares Isas was £8.8mn, compared with £650,000 for the largest 25 cash Isas, according to figures relating to the 2021-22 tax year, the latest data available. The average stocks-and-shares Isa pot was worth £65,218, five times the average for a cash Isa.
The Plum request found there were 4,850 Isa millionaires in 2021-22, more than three times the number for 2019-2020, as compound returns on stock market investments outstripped the interest earned on cash.
But critics say any new restrictions to cash Isas would alienate groups such as pensioners who may rely on that saving option, despite their much lower long-term returns.
Cash Isas “still have a place at the heart of family wealth building especially when interest rates are relatively high”, said Rajan Lakhani from Plum, adding that only one in five Britons would move their savings into stocks-and-shares Isas if the cap were reduced, according to a Plum-commissioned survey.
While the future of the cash Isa has been scrutinised, Khalaf says it is important to recognise that the £2.1bn cost would not reflect the amount the Exchequer could save by reducing or abolishing its allowance since money already held in a cash Isa would presumably retain its tax protection.
“The short-term impact on the Treasury’s books from such a policy would therefore be much, much smaller,” he said, “especially if it succeeded in its goal of encouraging more people to take out a stocks-and-shares Isa instead”.
