Keep your hands off our cash Isas: Chancellor must abandon crackdown on tax-free saving that would hit savers AND investors

As Chancellor John Healey delivers his first Budget in just two weeks' time, there is one urgent announcement he must make to help both savers and investors.

And appealingly, for a cash-strapped Chancellor struggling to balance the books, it's completely free.

Healey must reverse plans set in motion by his predecessor to slash the cash Isa allowance to £12,000 for under-65s.

The poorly thought-out policy from Rachel Reeves threatens to sabotage the much-loved Isa.

It will create confusion for savers, pile on costs and red tape for industry, and add complexity for no real gain.

That's why today, This Is Money is making a final demand to Healey to keep his hands off our cash Isas.

His predecessor ignored our common-sense appeal – as well as those from the financial industry, MPs and ordinary savers – choosing instead to forge ahead with a destructive policy.

Healey has the opportunity to put things right.

Our new research from investment platform Trading 212 today reveals that if Healey doesn't scrap the proposed changes once and for all, savers could, in fact, be put off investing – the exact opposite to what the new rules are supposedly designed to do.

The Isa is among the most popular financial products in the UK – more than 22 million adults have one in their financial armoury.

It's no wonder. In a world of financial complexity where everything from mortgages to pensions are riddled with rules to get your head around, the Isa is refreshingly simple.

You can put up to £20,000 of savings into Isas each tax year, where all of your returns – be they interest, investment growth or dividends – are completely shielded from HMRC.

You can open as many as you like –an easy-access cash one, a fixed-rate bond, a stocks and shares version – so long as you limit yourself to £20,000

a year. They are the perfect home for a rainy-day fund, savings for a child or teenager, and an investment pot for the long term.

For years, Isa holders have been trusted to use their allowance in the way that suits them best.

But from April next year, all of this is set to change – unless Healey intervenes. Under-65s will no longer be allowed to move their savings between cash and stocks and shares Isas as they choose.

Instead, they will only be able to put £12,000 of their allowance into cash Isas – and they will be forbidden from moving existing stocks and shares holdings into a cash Isa.

The long-term pledge that Isas will provide a watertight protection against tax will be broken. Cash held in a stocks and shares Isa will be taxed at a flat rate of 22 per cent – whether you're over or under 65 and have exceeded your cash Isa limit or not.

Your Isa provider will take the tax directly from your balance and pay it to HMRC. And you won't be able to use your personal savings allowance – which allows savers to earn a certain amount of interest tax free – towards this bill.

Then there are further rules to stop Isa holders getting around the main rules, which creates even more of a muddle.

For example, cash-like investments held in non-cash Isas will also incur tax, if they make up 100 per cent of the investments you hold in your account. 

Cash-like investments are typically money market funds – low-risk investments in short-dated bonds.

Suddenly, what started as a simple, trusted financial product starts to look increasingly convoluted and off-putting.

All this confusion might be worth it if the rules increased investment into the UK economy – as Reeves hoped they would.

But even HMRC predicts they won't make a difference. Its report into the changes last month revealed they are 'not expected to have a significant macroeconomic impact'.

What it will have an impact on is Isa providers – who will be bound by new red tape that is expected to cost them £6million just to set up. HMRC will also have to find

some cash as well and implement changes to its IT systems – not ideal for a body already groaning under ever-growing bureaucracy and insufficient resources.

The changes might be forgiven if they did encourage more savers to invest.

After all, investing tends to produce better returns than cash savings in the long term. If you have savings that you won't need for at least five to ten years, it is worth considering investing them.

But new findings from platform Trading 212 shared exclusively with This is Money reveal the restriction on cash Isas may do the exact opposite – savers could be hindered rather than helped to invest.

Trading 212 frequently offers some of the best cash Isa rates and so draws in hundreds of thousands of savers.

But they don't just stick to cash. More than 300,000 cash Isa savers have subsequently taken the leap and started to invest for the first time, Trading 212 revealed.

They may have started purely as cash savers, but they now invest billions of pounds into the markets.

And – most strikingly – this group now hold more wealth in stocks and shares Isas and general investment accounts than they do in their original cash Isas.

Of those who started with a cash Isa and went on to invest, they have now produced an average return of 12.7 per cent a year – significantly more than if they'd stayed in cash.

Isa holders are shifting from cash to stocks and shares without any Government meddling.

Arguably they are doing it precisely because there is no interference and they are able to do it at their own pace.

Mukid Chowdhury, UK chief executive of Trading 212, says: 'The brilliance of the UK Isa has always been its radical simplicity: you put money in, you manage your assets, and whatever returns you make are tax-free for ever. Introducing taxation inside a stocks and shares Isa strips away that clarity.

'The moment people have to worry about tax calculations inside an Isa, the wrapper loses its core appeal, and hesitant savers will simply stay on the sidelines.

'Our data shows that flexible cash Isas act as a highly effective gateway to investing.

'People start with a product they understand, become more comfortable with the platform and explore investing at their own pace.'

Holly Mackay, founder of investment website Boring Money, agrees that restricting the cash Isa is the wrong approach.

'Telling people they can't save as much in tax-free cash accounts is not going to suddenly create a nation of investors,' she says.

'That logic is flawed. It's a bit like telling a vegetarian they can't eat so many lentils and expecting them to rush to the butchers.

'We will get more people to invest by increasing financial education in schools and improving communication about the unquestionable benefits of investing with our longer-term savings. Not by slamming the lid shut on cash Isas.'

Chair of the Treasury Committee, Dame Meg Hillier, adds: 'The Treasury should focus on ensuring that people are equipped with the necessary information and confidence to make informed investment decisions. 

'Without this, I am unconvinced that these reforms will drive the cultural change that ministers want to see.

'There is real risk that they end up simply over-complicating the Isa landscape and confusing consumers.'

Hillier also suggests that the priority should be improving financial education and establishing high-quality financial advice and guidance for people.

Some people are holding more cash than they need to, but there are others who are maintaining a large balance for a perfectly good reason.

The new rules will prevent them from doing this – with the implicit message that they are not to be trusted to do what is right for them. 

For example, it can be perfectly prudent at times to move some money out of investments and into cash if you may need to spend it soon or you are worried about the outlook for financial markets.

Jason Hollands, of investment platform Bestinvest, says: 'This measure will impact on genuine investors who will routinely hold some cash in their account either awaiting investment, as a result of dividends being paid out, or because they want temporarily to park some money out of the market because they are concerned about the outlook.

'If we want to encourage people to invest, we should be making Isas simpler, not more complex.'

Savers may also stockpile cash because they are worried about further attacks on their allowances.

Many have already done this – which means the new rules have achieved precisely the opposite of what Reeves intended.

Sarah Coles, head of personal finance at investment platform AJ Bell, warns: 'The idea behind cutting the cash Isa allowance for those under the age of 65 was to encourage more people to invest.

'However, in the short-term it has boosted cash Isa savings instead, because people are filling their boots while they can.

'The rumours alone sparked an influx – so in 2024/25, 10.7 million savers piled £26.1billion more into cash Isas than a year earlier – a 37.5 per cent rise, with savers putting away £95.6billion.

'There are no guarantees that this trend won't continue even after April, if people worry the allowance could shrink again and think they need to squirrel money away in cash Isas while they can.

'Once the change is in place, it could put people off investing altogether. Faced with increasingly complex Isa rules, they may decide to stick with the simplicity of cash.'

It's rare that a Chancellor has a chance to cut red tape, help savers and investors, create simplicity – and slash costs.

That is why This Is Money is telling Chancellor Healey today: hands off our Cash Isas.

rachel.rickard@dailymail.co.uk