HMRC’s latest figures for 2023/24 show how strong the preference for cash still is. By the end of the decade, subscriptions to cash ISAs had increased by almost 224% more than subscriptions to stocks and shares ISAs. When you look at cash ISA vs stocks, cash very clearly comes out ahead in terms of popularity.
Source: HMRC.
Why cash ISAs are in the spotlight
The Chancellor’s plan to reform individual savings accounts (ISAs) has been under discussion for some time. The stated aim is to “improve returns for savers”.
Rachel Reeves’s scheme is widely believed to involve cutting the current £20,000-a-tax-year subscription limit for cash ISAs, while keeping the overall ISA framework.
The investment management industry has largely welcomed the idea, since it could steer more money towards investments. In contrast, the big banks and the Building Societies Association have been strongly opposed.
What the latest numbers show
Statistics published by HMRC in September add important context to the ISA debate.
In 2023/24:
- Subscriptions to cash ISAs were £69.5 billion.
- Stocks and shares ISAs attracted just over £31 billion.
By April 2024, the total amount invested in cash ISAs had reached £360 billion. It is reasonable to assume that the total by now is well above £400 billion.
These figures explain why many savers, when weighing up cash ISA vs stocks, still feel more comfortable leaving money on deposit.
Why the Treasury is paying attention
Now put yourself in the Chancellor’s shoes. Imagine the Bank of England held £400 billion of deposits and the Bank Rate was 4%. That would mean £16 billion of interest on which no income tax is being collected.
HMRC’s latest estimate is that the cost of income tax and capital gains tax relief for ISAs was £9.4 billion in 2024/25. That figure is almost a fifth higher than in the previous year. Cutting back the amount flowing into cash ISAs could reduce this tax “loss”. However, “enhanced returns for savers” is a more appealing message to present to the public.
Because of this, it is easy to see why future ISA reforms, and the balance of cash ISA vs stocks, are being watched closely in the Treasury.
How cash and investments have behaved over time
To be fair to the Chancellor, there is some justification in her argument. HMRC’s ISA investment values and subscriptions graph shows this clearly. Over the ten years to April 2024, the total value of stocks and shares ISAs grew more rapidly than the total value of cash ISAs.
However, cash ISAs saw very little net inflow for much of that period. It is easy to forget that the Bank of England base rate was no more than 1% between February 2009 and June 2022. That long stretch guaranteed miserable returns for money held on deposit.
Should you rush into a pre-Budget cash ISA?
Before you rush to arrange a pre-Budget cash ISA, it is worth pausing to think about your goal.
If you simply want to move an existing “ready money” deposit into a tax shelter, remember the personal savings allowance (PSA). Unless you are an additional or top rate taxpayer, the PSA already covers up to £200 of tax on interest.
(That is 20% basic rate x £1,000 PSA, or 40% higher rate x £500 PSA.)
In other words, many savers are not yet paying tax on interest at all, even without using a cash ISA.
Thinking about long-term growth
If you are setting money aside for long-term growth rather than short-term access, the picture changes. As the Chancellor suggests, there may be better options than holding everything in cash.
The right mix will depend on your time horizon, your attitude to risk and how much flexibility you need. For some savers, this will mean keeping a solid cash buffer and then using stocks and shares ISAs for longer-term goals.
Government guidance on how ISAs work, including the different types and current rules, can be found here.