The conspiracy to steal your cash savings tax break
🔸 Plus: What it really costs to live on a canal boat 🔸 The memory expert who studied London cabbies 🔸 Channel 4 stars detained in Iran for “security” offences 🔸 Would Trump really go after Harry?
Your 2-minute guide to demystifying money and making you richer
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Finance lobbyists are trying to steal your Cash ISA tax break
There is — literally — a conspiracy to abolish the tax-free advantage of saving your money in a Cash ISA.
Right now, UK law says that if you earn interest on your savings in a Cash ISA it’s tax-free up to a limit of £20,000 per year in deposits. A Cash ISA is simply a savings bank account with a different name to ensure it falls into the no-tax-on-your-interest scheme. The purpose is to allow people to build up life savings without penalising them by taxing those savings as income.
But lobbyists for financial firms in the City are conspiring to abolish Cash ISAs by ending the tax-free allowance.
We know this because the Financial Times named the people involved, and quoted some of them admitting it. They are: Phoenix (an insurance group); the London Stock Exchange; and the investment bank Peel Hunt. They met with Chancellor Rachel Reeves recently to persuade her to end Cash ISAs. Frustratingly, Reeves has entertained this prospect and not said she is against it — which how politicians leave the door open for things without being seen to support them.
The lobbyists believe that if the tax break is removed savers would be more likely to move their money to a Stocks & Shares ISA, where people will have to buy — you guessed it — stocks and mutual funds.
The City has five arguments as to why this is a good idea:
The UK government is strapped for cash, and Reeves is looking for any tax breaks she can abolish that might make the government’s books look better — especially if the tax break benefits people who already have money.
If you are serious about building long-term wealth, then saving in cash, even with tax-free interest, is not your best strategy. Cash interest pays around 4%. Stocks, on the other hand, will return 6-10% per year on average (using the S&P 500 index as the benchmark).
British people are too heavily invested in Cash ISAs compared to Stocks & Shares ISAs. According to HMRC, there were 12.4 million ISA accounts open in 2022-2023. Cash ISAs were 63.2% of those accounts. But the market value of all those accounts was £725.9 billion and Cash ISAs were only 40.5% of that value. That’s a clue that people with Stocks & Shares ISAs are doing better than those holding cash.
Holding cash can be riskier than holding stock. As Moneyin2 has argued before, the certainty of holding cash means that you risk losing all the gains you could have made if you’d been invested in stock. These gains can be substantial. Over the last five years, any cash held at 4% interest would have grown by 22.1%. But money invested in the S&P 500 over the same time-period would have grown by 80.9%. The cash saver lost 58.8 percentage points of growth in just five years.
It’s no secret that capital has fled the London Stock Exchange in the last few years. Both the government and the City are looking for ways to funnel more investment into British companies. Creating artificial demand in the stock market — by abolishing the Cash ISA tax break and replacing it with a Stocks & Shares ISA tax break for investment in UK companies — would be one way to do that.
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What’s really going on
While it is true that cash savers probably ought to think again about stocks, the lobbyists are clearly self-interested. Phoenix, LSE, Peel Hunt (and a thousand other investment platforms secretly cheering them on) make a lot more money from investors buying stock than they do from savers earning interest. So this is naked lobbying of the most cynical kind.
It is also true that the UK investment scene has been moribund over the last few years. Eighty-eight companies left the London Stock Exchange in 2024, mostly to relist in New York. Only 18 companies staged new IPOs in London. Money is fleeing the UK, basically, and Reeves really does need to do something to make Britain more attractive to investors.
But creating artificial demand for UK stocks by skewing the incentives for ordinary savers is probably not the way to do it. That’s one of the reasons the proposed “British ISA” and the former AIM ISA were both abolished.
(The British ISA was a proposal, never enacted, to give UK savers a tax break if they invested in UK companies. The AIM ISA was a type of Stocks & Shares ISA that gave you the tax break if you invested in companies on the AIM index, Britain’s market for smaller, newer, and sketchier companies. The AIM ISA was abolished in part because it was used mostly as an inheritance tax avoidance scheme and because returns on AIM are so poor that it hurt individual investors.)
Treat UK bias with caution
This has been a recurring theme in Reeves’ tenure as chancellor — trying to find ways to encourage people to invest their retirement savings in British companies. The government is pushing to reform pensions around this goal right now.
While the goal of attracting investment money to stay in the UK is a noble one, you, the individual investor, should treat these incentives with caution. The US market for stocks is far bigger than the UK one, and its pool of capital demand is far stronger — which is one reason returns in the US are so much greater. As we’ve said before on Moneyin2, “home bias” hurts you in investing.
Cash ISAs currently pay about £800 on 4% interest if you can max out the £20,000 annual deposit limit. £800 is nice but it’s not going to get you where you want to go. The Cash ISA isn’t the preserve of fat cats, in other words. It’s more likely to be used by people trying to save a deposit for a house or a new car or a holiday.
That’s why it feels so grubby for the City to come for a modest tax break that any person can tax advantage of, rich or poor.
The Moneyin2 Guide to Wealth
The Moneyin2 Guide to Wealth will get you the biggest return on your savings by maximising cash matches from your employer, free cash from the government, and shielding your investment gains from tax. It takes you step-by-step through the world of pensions, SIPPs, ISAs and ETFs — all in plain English.
And for dessert …
What it really costs to live on a canal boat.
How the memory expert who extensively studied the hippocampus of London taxi drivers transformed our understanding of memory
Couple who starred on Channel 4 show detained in Iran for “security” offences
Donald Trump says he’ll take legal action if Prince Harry lied on his visa application
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