Is the UKs love affair with ISAs heading for a break-up?

In the Spring Statement, Rachel Reeves announced plans to reform ISAs to ‘get the balance right between cash and equities’.

Her goal is to foster a stronger culture of retail investment in the UK and unlock investment for UK businesses.

It’s a move that has divided opinion among investors and financial planners because it’s a product that works and is commonly understood and there aren’t too many that can tick both of those boxes.

So why does the Chancellor want to upset the order of things? Put bluntly, the UK has a growth issue, and the Chancellor is taking inspiration from the US, where people have a much easier relationship with investing, higher levels of disposable income and generally, a much higher tolerance for risk. The money flowing into the system would no doubt find its way to the Treasury too, solving another problem.

A brief history

ISAs have become a cornerstone of personal finance in the UK, offering a flexible and tax-efficient way to save and invest. You can go through every stage of life with an ISA; start in nappies thanks to Junior ISAs, buy a home or save for a pension with a Lifetime ISA, and pass them on as part of a legacy.

Individual Savings Accounts (ISAs) were introduced in the UK on April 6, 1999, by then Chancellor of the Exchequer, Gordon Brown. They were designed to encourage saving by offering tax-free returns on investments. ISAs replaced earlier savings schemes such as Personal Equity Plans (PEPs) and Tax-Exempt Special Savings Accounts (TESSAs).

ISA Allowance over time

The annual ISA allowance has increased over the years. Initially set at £7,000, it has risen to £20,000 as of the 2020/21 tax year and has stayed there since. This allowance can be split across different types of ISAs, which helps people save and invest according to their circumstances and risk tolerance.

Cash ISA Millionaires

As the old saying goes, “mighty oaks from tiny acorns grow” and this is certainly true of the wealth some have managed to accumulate in their ISAs, patiently growing them over many years and shielding growth from tax.

The number of ISA millionaires has grown significantly since 1999. As of April 2022, there were approximately 4,850 ISA millionaires in the UK. These individuals have accumulated over £1 million in their ISAs, primarily through investments in stocks and shares.

The First ISA Millionaire

Lord John Lee of Trafford became the first ISA millionaire in 2003. He achieved this milestone through maximising his annual ISA allowances and focusing on investments. His success story has inspired many to utilise ISAs as a tool for long-term wealth accumulation. To be clear, Lord Lee had been investing prior to 1999 in PEPs, which were launched in 1987, but were allowed to be placed in ISAs, so he had something of a head start!

What do investors think?

Rathbone’s latest study revealed that 61% of retail investors do not want to see changes to ISA rules that would scrap or restrict the annual allowance to cash ISAs.

Eleven per cent said they were in favour, while 27% did not express an opinion. Cash ISAs serve a purpose, giving people easy access to rainy day funds, for example. Investments carry warnings and talk about risk, which without advice or at least some guidance, risks opening people up to potential harm.

The allowance can be split across different types of ISAs, including Cash ISAs, Stocks and Shares ISAs, Innovative Finance ISAs, and Lifetime ISAs (LISA), which has its own limit of £4,000 per year, included in the overall ISA allowance (£20,000, tax year 2025/26)5. This flexibility allows savers to tailor their investments according to their financial goals.

The adviser view

Andrew Mence, a Financial Planner at Wren Sterling, sees the move as underwhelming and backs an educational approach: “The call for a reduction in the cash ISA limit is largely being promoted by those with vested interests, such as the investment management sector. Targeting cash ISA savers and encouraging them to invest is not going to make that much of a difference in the grand scheme of things.

“If I was the Chancellor and I wanted to promote improved investment awareness and action, I’d improve education in schools and talk about the great companies people can invest in over the longer term.”

What might happen?

It’s under review at the moment, so we might get some timely leaks over the coming months on the direction of travel, but it seems unlikely that there would be any changes in the current tax year.

If we consider that the Chancellor’s main goals are to increase investment in the UK and to increase the tax take, these are her options.

The obvious move would be to reduce the cash ISA limit each year, while keeping the overall £20,000 limit unchanged, so people could continue to shield £20,000 a year, but some of that would need to be invested. It’s a single message to deliver, which would give it a better chance of being understood.

Reducing the overall limit would obviously cause cash or investments to exist outside of the ISA wrapper and be subject to tax, either as capital gains tax (CGT) on the sale of shares, or as interest tax in savings accounts, once the saver has reached the limit of their annual interest allowance (which depends on their marginal rate of tax). However, this is unlikely to get more people investing.

It’s possible we might see some creativity with a hybrid product that offers lower risk investments, such as investment portfolios with only 20 or 40 percent invested in equities to bridge the gap between cash and investments.

Is the Chancellor looking in the wrong place?

Institutional investment in the UK might be the more obvious place to look for growth, as retail investors hold just 26 percent of UK investments.6 Donald Trump’s unpredictable style could spook companies and create an opportunity for the UK to win flotations, which might otherwise have been tempted by New York.

The Chancellor could sweeten the opportunity further by relaxing some taxes and reducing the red tape that is holding businesses back. That’s the optimistic take, but just a year ago, Rachel Reeves campaigned on a ticket that was all about unleashing growth, so as tariffs on the one hand cause her pain, there is a chance to back her instincts and get the UK’s economy firing.