Savers deposited £3.1 billion into Cash ISAs in May, following a £12 billion influx in April, as families rush to take advantage before the HMRC allowance reduction and broader tax modifications take effect from April 2027.
Fresh data from the Bank of England reveals the surge in deposits, with total deposits at banks and building societies increasing by £5.4 billion during May. Alongside the ISA stampede, savers contributed £1.3 billion to fixed-rate savings accounts while removing £2 billion from easy-access accounts, indicating many are securing higher-paying arrangements before rates start to decline.
Interest Rates Rise as Savers Lock In
The average interest rate on new fixed-rate accounts rose to 4.26% in May, up from 4.07% in April, while easy-access accounts remained static at just 1.65%. According to Moneyfacts, the top easy-access Cash ISA products currently offer around 4.2% to 4.6%, though many include temporary bonus rates that subsequently expire. Meanwhile, one-year fixed Cash ISAs are providing between 4.55% and 4.70%, benefiting those willing to commit their money.
Experts caution that fixed accounts are only appropriate for cash that won't be required during the term, as early withdrawals frequently incur penalties or forfeiture of interest.
Government Policy Backfires, Experts Say
Sarah Coles, head of personal finance at AJ Bell, said the Government's planned ISA overhaul was having precisely the opposite effect to that intended. She said: "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. This tax year is the last chance for under-65s to pay in up to £20,000 before their allowance is cut to £12,000 from April 6, 2027. It means they're filling their boots while they can. For a policy that was intended to encourage people to move away from cash and towards investing, this is hardly the result the Government would have been hoping for."
The caution arrives as Chancellor Rachel Reeves forges ahead with a raft of tax modifications impacting savers from April next year. In addition to the reduced Cash ISA threshold, savers are also confronting elevated tax rates on interest generated outside tax-efficient accounts, rendering ISAs increasingly attractive.
Further Tax Changes on the Horizon
Clare Stinton, senior personal finance analyst at Hargreaves Lansdown, said the changes meant the countdown had already begun. She said: "People are choosing to house their hard-earned money in Cash ISAs and it's easy to understand why. As things stand, next April will bring a host of changes for savers. A reduced Cash ISA allowance for those aged 18-64 will coincide with the introduction of higher tax rates on savings interest outside of ISAs and pensions, not to mention last week's announcement that cash savings held in a Stocks & Shares ISA could face a 22% tax on interest from 2027. It's use it or lose it and the countdown is on."
The combination of changes means many savers are anticipated to make full use of this year's £20,000 allowance while they still can. Financial advisers say those with significant cash reserves should examine where their savings are held before the rules become stricter.
What Changes Take Effect from April 2027?
Cash ISA allowance for adults aged 18-64 drops from £20,000 to £12,000. Increased tax rates on savings interest outside ISAs and pensions are also scheduled to come into force. Separate alterations announced last week mean cash held within a Stocks & Shares ISA is anticipated to become liable to a 22% tax on interest from April 2027.
