Labour Chancellor Rachel Reeves is considering a change to ISA accounts in the 2025 Spring Statement later this month. The annual ISA allowance may be substantially reduced from its current £20,000 to levels potentially as low as £4,000.
We have produced a simple calculator here, which takes into account how much you save (including any existing savings) and then calculates the taxes you could incur should the government change the allowances on ISAs.
The annual ISA allowance (currently £20,000) limits how much you can deposit into ISAs in a tax year. Any money within an ISA grows completely tax-free, with no tax on interest, dividends, or capital gains. Money that cannot be placed in an ISA (exceeding the allowance) would typically go into standard savings accounts. Interest earned in standard savings accounts is subject to income tax.
There are some savings allowances (on top of your regular tax-free allowance):
- Basic rate taxpayers: £1,000 Personal Savings Allowance (PSA).
- Higher rate taxpayers: £500 PSA.
- Additional rate taxpayers: No PSA.
Only interest exceeding the PSA is taxed at the individual's income tax rate.
The changes proposed (reduction of allowances) are aimed at increasing revenue and incentivising savers to invest in higher-risk, higher-return assets rather than simply relying on cash ISAs.
There is also some speculation about the potential abolition of cash ISAs. The government may seek to direct savers toward stocks and shares ISAs, which are considered more beneficial in stimulating long-term economic growth.
Other changes that could happen to savings accounts include:
- Adjustments to Lifetime ISAs (LISAs) are anticipated. Proposed changes include raising the property price cap (currently £450,000) to better reflect current housing prices and reducing the penalty imposed on withdrawals for non-qualifying reasons. These modifications aim to make the LISA more flexible and relevant to modern financial conditions.
- Additional proposals could include the introduction of a lifetime cap on the total value of ISAs held. This measure would primarily target higher net worth individuals, ensuring that tax-free savings continue to serve broader fiscal objectives and maintain progressive tax principles.
- Potential transfer options may be introduced. If Cash ISAs were to be phased out, the government would likely provide mechanisms for savers to transfer existing Cash ISA balances to other ISA products (such as Stocks and Shares ISAs) while maintaining their tax-free status. Existing Cash ISAs might be designated as legacy products that could be maintained but not receive new contributions, similar to how certain pension products have been handled in previous reforms.
Existing Cash ISA balances would likely be protected (grandfathered). Prior precedent with tax and savings reforms suggests that money already saved in Cash ISAs would retain its tax-free status, even if Cash ISAs were to be abolished or significantly modified for new contributions. No retrospective taxation is expected as the government typically avoids retrospective taxation changes, meaning funds already accumulated tax-free in Cash ISAs would almost certainly remain tax-free.
