Chancellor Rachel Reeves' decision to slash the Cash ISA allowance for under-65s from £20,000 to £12,000 per year, effective April 2027, has backfired spectacularly, sparking a rush to deposit cash while the higher limit remains. Financial experts warn this 'unintended consequence' undermines the government's goal of encouraging investment in stocks and shares.
Massive surge in Cash ISA deposits
According to figures from AJ Bell, savers funnelled a record £12 billion into Cash ISAs in April 2026, one of the highest monthly totals ever recorded. Sarah Coles, head of personal finance at AJ Bell, described the trend as 'hardly the result the government would have been hoping for'. She stated: 'The dash for Cash ISAs in May, on the back of a £12 billion boost in April, lays bare the unintended consequences of cutting the Cash ISA allowance.'
The changes, announced in the 2025 Budget, also include a 22% tax on interest from uninvested funds in Stocks and Shares ISAs, set to take effect in the 2027/28 tax year. Reeves aims to push more people toward higher-yielding assets like stocks, which historically outperform cash against inflation.
Why savers are flocking to cash
Ms Coles explained that this tax year is the last chance for under-65s to deposit up to £20,000 before the cap drops. 'It means they're filling their boots while they can,' she said. Many savers are also moving from easy-access accounts into fixed-rate ISAs, attracted by higher rates driven by inflation expectations and market competition.
Cash ISAs often fail to keep pace with inflation, eroding purchasing power. However, Ms Coles noted that cash remains essential for short-term needs: 'Anyone of working age typically needs enough to cover three to six months' worth of essential spending in an easy access account – plus money for any planned one-off expenses in the next five years.'
Stocks and Shares ISAs as an alternative
Beyond emergency funds, Ms Coles recommended considering Stocks and Shares ISAs for long-term growth. 'In the short term you may see the ups and downs of the stock market, but in the long run, it has a far better chance of beating inflation, so you can build a valuable nest egg,' she said.
The policy shift has also coincided with broader economic uncertainty. Mortgage approvals dipped in May 2026, as rising rates and geopolitical tensions, including the Iran war, dampened buyer enthusiasm. Ms Coles noted that a recent peace agreement may revive the property market, but cautioned that 'the recent turmoil has persuaded them that now isn't the time to take a leap of faith'.
