Stephen McGee

Cutting the annual cash ISA limit to around £8,000 would allow households to build a solid emergency fund while encouraging additional savings to flow into long-term investments, particularly if backed by clear Government messaging about the benefits of investing.

There is a strong case for reducing the cash ISA allowance if the aim is to genuinely shift saving and investing behaviour. A cap of around £8,000 would still give families ample room to build a meaningful cash buffer, while nudging those saving larger sums to consider investing the rest for the long term.”

The UK’s reliance on cash savings is one of the biggest drags on household wealth creation. Around £360 billion is held in cash ISAs, often earning rates that struggle to keep pace with inflation, meaning savers are seeing their spending power diminish. By contrast, UK equities have historically delivered real returns of roughly 6% per year. Even a modest reallocation of savings into equities could materially improve outcomes for households and support investment in UK businesses.

Historically, policy encouraged this balance. Before 2014/15, the stocks and shares ISA allowance was set higher than the cash allowance to promote long-term investing. While the absolute limits were lower than today, the principle remains relevant. It gives people room to build cash reserves, while steering longer-term savings into investments. Revisiting that approach for 2025/26 could help rebuild household wealth and support the wider economy.

With average monthly household spending at around £2,700, a three-month emergency fund amounts to roughly £8,100, broadly aligned with the proposed cap. With many savers regularly making substantial ISA contributions, any amount above the cash limit could naturally flow into investments instead.

Some argue that pensioners would be disadvantaged by a lower limit, as they often prioritise cash. That concern has merit. Many pensioners, however, have already accumulated significant cash reserves, and for those who haven’t, Government could consider a carve-out for those accessing tax-free pension cash or for those above State Pension age. This would need careful administration.

But a lower allowance on its own won’t transform the UK’s savings culture. This needs to be part of a broader effort. The UK needs to foster a more confident, long-term investing mindset similar to the US, and that requires Government support through education and awareness. Without that, savers may simply move the excess into taxable cash accounts and continue missing out on the long-term benefits of investing.

Stephen McGee is chief executive of Scottish Friendly