So, what is an ISA good for? Investing. It was built for the long game – money you won’t need for years – and its real value is sheltering investment growth and dividends from tax.
Ever since the cash ISA changes turned up in the headlines, people have been arriving at my desk worried they’re about to lose something. From April 2027, under-65s will be able to pay less into a cash ISA each year – £12,000 instead of £20,000 – and the coverage makes it sound like a blow.
I’d say most people are worrying about the wrong thing. The real question isn’t how much you can put into a cash ISA. It’s whether you should be putting money into one at all.
(Quick definition first. An ISA – Individual Savings Account – is a wrapper that shelters your savings or investments from tax. A cash ISA holds savings; a stocks and shares ISA holds investments. You get an allowance to pay in each year.)
What’s actually changing
From April 2027, the most an under-65 can pay into a cash ISA each year drops from £20,000 to £12,000. The overall ISA allowance stays at £20,000 – it’s only the cash slice that shrinks. If you’re 65 or over, even that doesn’t apply, at least for now.
That’s the change. And for most people it matters far less than it sounds.
A cash ISA shelters you from a tax you probably aren’t paying
The point of any ISA is to keep your money out of the taxman’s reach. The trouble is that, for a great many people, a cash ISA shelters interest that was never going to be taxed in the first place.
Everyone gets a Personal Savings Allowance – £1,000 of savings interest a year tax-free for basic-rate taxpayers. On top of that, if your other income is low, you can earn up to a further £5,000 of interest tax-free, under what’s called the starting rate for savings. The exact figures shift from one Budget to the next, and how much you’d pay depends on the rest of your income – but the shape of it rarely changes: a lot of people, retirees on a modest pension especially, would need well over a hundred thousand pounds in savings before they paid a penny of tax on the interest. For them, a cash ISA guards against a tax they were never going to pay. And cash ISA rates are rarely the best on the market anyway.
What the wrapper is actually for
So what is an ISA good for? Investing. It was built for the long game – money you won’t need for years – and its real value is sheltering investment growth and dividends from tax. That matters more than it used to, because the tax-free allowances for capital gains and dividends outside an ISA have been cut hard in recent years.
Investing isn’t the same as saving, though, and it shouldn’t pretend to be. The value of investments rises and falls, and there will be stretches when your pot is worth less than you paid in. That’s the trade-off for giving your money the chance to grow faster than cash over the long run – and it’s exactly why you don’t invest money you might need next month. Give it five, ten, twenty years and those ups and downs have room to even out. Hold a growing investment in a stocks and shares ISA over that kind of horizon, and you keep gains the taxman would otherwise increasingly like a slice of.
Where that leaves cash
None of this makes cash the enemy. It means cash has a job, and that job is short-term. The money you might need in the next six months or so – the emergency fund, the new boiler, the car that’s on its last legs – belongs in an easy-access account where you can reach it. That’s what cash is for, and it’s the safety net that lets you leave your investments alone long enough to do their work. It was never meant to be where you park money for the next twenty years.
I sat down recently with someone who’d built up around £80,000 across a handful of cash ISAs over the years. Careful, sensible, never missed an allowance. But the interest was modest, she wasn’t paying tax on it anyway, and the money had stood still for the best part of a decade while prices climbed. All that diligence, and the wrapper wasn’t doing a thing for her. That’s the conversation worth having – not whether next year’s cash allowance is £20,000 or £12,000.
So I wouldn’t lose sleep over a smaller cash ISA allowance. For most people it was protecting money from a tax they weren’t paying. The better question, and the one worth sitting down over, is whether that money should be in cash at all. Cash is for what you might need this year. An ISA is for what you won’t touch for a decade. Get those two the right way round, and the allowance is the least of your worries.
Daren Wallbank is a Chartered Financial Planner and Co-Founder of Ginkgo Financial in Blackheath.
