Cash ISA reform back on the table ahead of November Budget

Chancellor Rachel Reeves is reportedly considering changes to the Cash ISA allowance to boost retail investing. While the government wants to “get the balance right” between saving and investing, AJ Bell says cutting the Cash ISA limit would have little impact. Instead, it urges a full simplification of the ISA system—merging Cash and Stocks and Shares ISAs into one—to remove barriers and encourage long-term investing.

AJ Bell director of public policy, Tom Selby, says:

“The chancellor is absolutely right to challenge the status quo on ISAs. Any reforms pursued at the Budget should focus on making it as easy as possible for those with excess cash to invest for the long-term.

“The current fragmented market is overly complex and behaviourally illiterate, driving millions of people who could benefit from long-term investing to stick with cash, leaving them vulnerable to the impact of inflation. Simplifying ISAs by combining the cash and investment versions into a single product is the obvious long-term answer, making the system simpler to navigate and removing barriers between saving and investing.

“If the government wants to send a message that it is backing UK markets as part of a retail investing drive, scrapping stamp duty on UK stocks bought within ISAs would be a straightforward, low-cost option that would be welcomed by retail investors and listed companies alike.”

AJ Bell’s ISA campaign work

AJ Bell has long campaigned for simplification of the ISA system, working with both this government and the previous to make it easier for people to save and invest. In its One ISA paper launched in 2023, the business highlighted the complexity of the current ISA system with six different products, and proposed consolidating all existing ISA variations into one single ISA product.

Before winning the election last year, Labour made clear its intentions to simplify the ISA system to try and foster a culture of retail investing in the UK. AJ Bell has led calls on how the government should do this, initially by merging Cash and Stocks and Shares ISAs and removing barriers to investing as a first step towards consolidation of the ISA market.

At the Spring Statement in March this year, Rachel Reeves again outlined the government’s ambition to reform the ISA system, with a focus on getting the ‘balance right’ between cash and equities. AJ Bell subsequently urged the government to reform the system for the benefit of consumers by:

• Radically simplifying the upfront choice available to investors, initially by merging Cash ISAs and Stocks and Shares ISAs into a single main ISA product
• Introducing improved help for savers and investors through ‘Targeted Support’ reforms
• Government should remove the disincentive to invest in UK Plc by scrapping stamp duty on UK shares bought through ISAs – a reform which would cost around £120 million

It then emerged that the government was considering cutting the tax-free allowance of the Cash ISA as part of this, but AJ Bell consumer research showed that only one fifth of Cash ISA holders would invest in the stock market if the Cash ISA allowance was cut. This illustrated that tinkering with the Cash ISA was unlikely to achieve the chancellor’s stated aims of boosting economic growth and fostering a culture of retail investing in the UK.

A recent behavioural economics review commission by AJ Bell illustrates the impact divisive choice and friction in the ISA market has on consumer behaviour. Faced with excess complexity, people often choose the path of least resistance in the form of cash saving. Removing complexity could play a crucial role in smashing the psychological and material barriers between saving and investing, helping to unleash a retail investing revolution.