An expert has revealed a way to get around a change that Rachel Reeves is reported planning to make to ISAs. In an effort to get savers to move their money into stocks and shares, the Chancellor is thought to want to slash the tax-free limit of a cash ISA from £20,000 to £10,000. Currently, account holders can deposit £20,000 a year without paying tax across all types of ISAs – including cash ISAs, stocks and shares ISAs, lifetime ISAs, and innovative finance ISAs.
Mark Burges Watson, Co-Founder of Kaldi, believes that the limit could be cut as low as £4,000. If so, he said “many savers will be left wondering what to do with the remaining £16,000 of their tax-free allowance — especially if they’re not comfortable taking on stock market risk”. However, “there’s a solution that few people are talking about: money market funds,” Mr Watson added. “These ultra-low-risk funds, which invest in things like short-term government bonds, offer cash-like returns — often higher than a Cash ISA — while counting as a Stocks & Shares ISA.
“That means you can preserve the full £20,000 ISA allowance, avoid stock market volatility, and still earn interest that tracks the Bank of England base rate.
“Money market funds are considered to be ultra safe, because, prior to the 2008 financial crisis, only three MM funds had ever ‘broken the buck’ (fallen below an NAV of $1) in 37 years of MM funds being available to invest in.
“In other words, losses are vanishingly rare, and for cautious savers or those planning for short-term goals, MM funds can be a smart, lower-risk alternative to stocks — while still helping to maximise ISA allowances if the Cash ISA cap is cut.”
Earlier this week, Ms Reeves confirmed as part of her Leeds Reforms that long-term asset funds can be included in stocks and shares ISAs from next year.
The Government, she added, will continue to consider reforms to ISAs and savings to strike the right balance between cash savings and investment.
Cuts to the allowance could penalise cautious savers, undermine retirement planning, and push individuals into unnecessary tax complexity, financial planning experts at Saltus have suggested.
“Clients with large cash ISA holdings aren’t typically chasing high returns, they are prioritising security, flexibility and peace of mind. For many, cash ISAs offer a simple and low-risk way to manage their savings without worrying about market volatility,” Henrietta Grimston, financial planner at the firm said.
“Reducing the allowance risks penalising these sensible savers, making it harder to build tax-efficient pots for the future. As people approach retirement, or other significant milestones where they need to access capital quickly, this could create a bigger savings burden, with tax taking a greater bite out of any growth.
“This could also reduce the overall efficiency of their retirement savings plans, as less can be sheltered in a tax-free wrapper, meaning they may need to save more just to reach the same target.
“It also risks pushing individuals into more complex tax situations, where they may need to submit tax returns for the first time, adding administrative stress and potentially costly mistakes.”