UK ministers are considering reducing the annual tax-free allowance for cash Individual Savings Accounts (ISAs) from the current £20,000 to a lower threshold. This proposal aims to encourage savers to invest more in UK equities, thereby stimulating the London stock market. The potential change was discussed in a meeting on May 16, 2025, between City Minister Emma Reynolds and senior leaders from major banks, including HSBC, Barclays, and NatWest. While no final decision has been made, expectations are growing that the threshold will be lowered.

Introduced in 1999, ISAs allow individuals to save or invest up to £20,000 annually without paying income or capital gains tax. This allowance can be allocated to cash ISAs, stocks and shares ISAs, or a combination of both. Cash ISAs are particularly popular, holding approximately £300 billion in savings.

The UK government is seeking to promote economic growth by encouraging retail investment in domestic equities. By reducing the cash ISA allowance, ministers hope to shift savers from low-yield cash holdings to potentially higher-return investments in the stock market. This move aligns with broader strategies to reinvigorate the UK's capital markets and foster a culture of investment.

Some investment firms advocate for a single ISA structure with a lower cash cap. Fidelity International, for instance, supports merging cash and stocks and shares ISAs into one flexible product, allowing savings to shift between cash and stocks. They propose capping the cash component at £4,000 to encourage more investment in equities.

Conversely, organizations like UK Finance oppose reducing the cash ISA allowance, arguing it could limit savers' flexibility and deter those who prefer the security of cash savings. Research indicates that 61% of retail investors do not want changes to ISA rules that would restrict the annual allowance for cash ISAs.

Many individuals, particularly pensioners, rely on cash ISAs for secure, tax-free savings. The average ISA balance for people aged 65 and over in 2021-2022 was around £63,365, compared to £9,477 for those aged 25 to 34. Reducing the allowance may disproportionately affect older savers who prefer low-risk savings options.

Building societies and credit unions, which rely on cash ISA deposits to fund mortgage lending, warn that changes could impact their ability to offer competitive mortgage rates, particularly for first-time buyers. Richard Fearon, CEO of Leeds Building Society, stated, "If you significantly reduce that funding, mortgage rates would become more expensive for borrowers."

Proponents argue that the reform could foster a culture of investment, leading to better long-term returns for savers and increased capital for UK businesses. However, critics caution that without adequate financial education and support, savers may not be inclined to shift from cash to equities.

This potential reform represents one of the most significant changes to ISAs since their inception in 1999. Previous discussions, such as the proposal for a 'British ISA' offering additional tax-free allowances for investments in UK equities, have been met with mixed responses and were not implemented.

As the UK government considers reducing the cash ISA allowance to stimulate investment in equities, it faces a delicate balance between promoting economic growth and preserving savers' flexibility and security. Ongoing consultations with industry stakeholders will be crucial in shaping a policy that addresses these complex considerations.