Don't cut Cash ISA limit, MPs urge Government – as Martin Lewis says 'carrot will work better than a stick' to encourage investing

A cash ISA is just a savings account where you never pay tax on the interest. Currently, you can pay up to £20,000 into one each tax year – but there have been persistent rumours that the Government is considering reducing this limit, possibly to £10,000 a year, in order to encourage people to invest instead.

In its new report, the Treasury Committee has taken a strong stance against such a move. The report cites evidence from Martin, who has consistently argued against cutting the cash ISA allowance and has suggested an alternative in the form of a 'starter investment ISA'.

Key takeaways from the new report

The Treasury Committee has urged the Government to reconsider how cutting the cash ISA allowance might impact savers and the broader economy. Here are some key points from the report:

• Only a small percentage of cash ISA holders would be likely to move money into stocks and shares ISAs if the limit were cut. The report cited a survey from savings provider Hampshire Trust Bank, which found that fewer than one in 10 (9%) of its customers said they'd move savings into a stocks and shares ISA if the cash ISA allowance were to be cut – while almost half (48.5%) said they would move money to other savings accounts.
  
  After reviewing this and other evidence, the Treasury Committee concluded that "reducing the cash ISA allowance is unlikely to drive a significant transfer of cash savings into investment products".

• Cutting the cash ISA limit would harm building societies. Building societies rely on cash ISAs to help fund their mortgage lending. Slashing the limit would reduce building societies' access to this money, which would "undermine" their "stability and competitiveness", thereby negatively impacting consumers and the wider economy, said the report.

• The Government should focus on financial literacy and inclusion instead. Improving access to advice and guidance, for example, would allow "individuals to make informed decisions about their savings and investments" – a better route than attempting to make those decisions for them.
  
  Dame Meg Hillier, chair of the Treasury Select Committee, said: "The Treasury should focus on ensuring that people are equipped with the necessary information and confidence to make informed investment decisions. Without this, I fear that the Chancellor's attempts to transform the UK's investment culture simply will not deliver the change she seeks, instead hitting savers and mortgage borrowers."

• If the Government wants to change the way people invest and save, it should consider ALL types of accounts, not just ISAs. Cash ISAs shouldn't be considered "in isolation", since a large portion of savers' money is sitting in standard bank and savings accounts, the report said. As a result, it "may be more sensible" for the Government to start any reform by looking at other tax-free allowances (such as the personal savings allowance).

Martin Lewis: A cash ISA cut isn't the solution to a lack of investing

Following the most recent reports of a potential cash ISA cut earlier this month, Martin said on X:

It's not the first time a Cash ISA limit cut has been hinted at

The Government confirmed it was looking at options to reform ISAs earlier this year. It said it recognised the importance of cash savings, but also wanted to see consumers invest more.

In July, rumours swirled that the cash ISA limit could be reduced to as little as £4,000, though Martin posted on X that he suspected it was more likely to be down to £10,000 or £15,000. He'd also had confirmation from the Government that "retrospective changes would not be considered under any scenario."

Around the same time, more than 50 building societies and other financial institutions signed an open letter to the Chancellor Rachel Reeves urging her to "save cash ISAs and keep the £20,000 limit", before the plans were reportedly put on hold. Speculation has now resurfaced ahead of the Budget on Wednesday 26 November, which is when we should find out for sure if any cash ISA changes are on the cards.