Halving annual cash ISA allowance could deliver £7 billion boost to savers who invest the extra cash in stocks

Halving the annual cash ISA allowance could provide a £7.2 billion returns boost for cash ISA holders likely to invest their excess funds, according to new analysis from investing and trading platform IG.

With the Chancellor expected to announce a move towards this in her upcoming Budget, IG outlines how impactful this could be in helping to drive a culture of investment in the UK.  

The potential £7.2 billion returns boost for savers

Using HMRC data, IG found that around one-third of cash ISA holders – roughly 2.8 million people – currently contribute more than £10k each year. Recent YouGov research shows that 28% of this group say they would invest any money above the new allowance into a stocks and shares ISA.

Combining these figures, IG’s analysis estimates potential additional returns of £7.2 billion over five years for this group of around 784,000 savers – equating to over £9.1k per saver.

To calculate the difference in projected returns between cash and investing, IG applied industry five-year forecasts for UK base rates alongside historical average returns from global markets, providing a realistic estimate of the potential gains from reallocating excess cash into stocks and shares ISAs.

IG analysis refutes building societies’ claims of significant impact on mortgage lending

Concerns that reducing the annual cash ISA allowance could hurt building society deposits, and as a consequence the mortgage market, appear largely overstated. 

The Building Society Association (BSA) reports that building societies hold around 40% of cash ISA balances. IG’s analysis finds that around £1.6 billion of cash ISA contributions usually directed to building societies each year – just 0.4% of their total retail deposits – could be redirected to investing, indicating minimal impact on the sector.

Michael Healy, UK Managing Director at IG, said: 

“The Chancellor is absolutely right to tackle the UK’s overreliance on savings, starting with a product that does nothing for long-term wealth creation – the cash ISA. Reducing the annual allowance to £10k sends the right message that the government is serious about getting more people investing and we would encourage the government to go further by abolishing the cash ISA altogether.

“Our analysis refutes the claim from building societies that reducing the cash ISA allowance to 10k would impact their deposits significantly.  Suggestions that it could threaten the mortgage market are simply scaremongering. The reality is that this reform is sensible, proportionate, and long overdue. We urge the Chancellor to stick to her guns.”