Is it time to use up this year’s cash ISA Allowance?

Rumours have swirled since before the last Autumn Statement about a possible cut to the annual cash ISA allowance. It is now known that the Chancellor has been evaluating cutting this allowance. It is not yet known what, if anything, has been decided but there is talk of it being reduced from £20,000 to £4,000.

A cash ISA is simply a savings account where you never pay tax on the interest earned. For as long as the cash sits in there, it stays tax-free year after year. This can be useful for people with large sums of cash to save, as lower rate taxpayers can only earn £1,000 in interest tax-free a year; for higher rate taxpayers it is £500.

This move is being considered as the Chancellor believes it will encourage people to switch from cash ISAs to stocks and shares ISAs (also a tax-free investment) which would help stimulate the economy. However, stocks and shares ISAs carry risks as well as potentially better returns than cash ISAs so it remains to be seen if people will switch. The Government has stated that 'it is working closely with the Financial Conduct Authority to deliver a system of targeted support to give people the confidence to invest'.

If you were planning to invest in a cash ISA this tax year anyway, it may be prudent to do so now, before any potential changes come into force.