Today, the cash ISA is becoming unloved for the majority. Rates are pitiful – even more so than regular accounts. While the nation became one of accidental savers last year, you’d expect the reserves of cash ISAs to have plumped as well. Instead, what has happened is the largest outflow of cash ISA money in a 6 month period on record. So is the cash ISA now a dead duck and what is prompting such an exodus? There was £4.8 billion withdrawn from bank and building society cash ISAs in the final six months of 2020. This is the highest outflow in a half year period on record, according to Bank of England data analysed by AJ Bell. This is despite £72 billion flowing into cash deposit accounts in the same period – more Britons managed to save in the pandemic, with the Office for National Statistics savings ratio measure setting a record high between April and June 2020, and still way above normal levels in the following three months. Meanwhile, the first half of 2020 saw the smallest amount of money enter cash ISAs except for 2017, which was likely due to the new Personal Savings Allowance (PSA). The PSA was revealed in April 2016. For basic-rate taxpayers, £1,000 of savings interest can be paid tax-free, while for higher-rate taxpayers this is a lower £500. Essentially, with rock bottom savings rates on offer, the chances of nudging over these amounts at present is small. Based on the 0.35% interest rate currently on offer from the typical cash ISA, that would mean a basic-rate taxpayer would need £285,700 held in a cash ISA account before the wrapper delivers any tax benefit. For a higher rate taxpayer, the figure is £142,800. There could now be an argument to say that cash ISA saving is now really for wealthier people. Additional rate taxpayers do not have a PSA, and it means the ISA wrapper is a vital tool. In a clear case of the law of unintended consequences, a progressive tax policy introduced in 2016 has therefore tilted cash ISAs towards being a product which is best suited to wealthier members of society.

Past performance is not a reliable guide to the future. The value of investments and the income from them can go down as well as up. The value of tax reliefs depend upon individual circumstances and tax rules may change. The FCA does not regulate tax advice. This newsletter is provided strictly for general consideration only and is based on our understanding of law and HM Revenue & Customs practice as of February 2021 and the contents of the Finance Bill. No action must be taken or refrained from based on its contents alone. Accordingly, no responsibility can be assumed for any loss occasioned in connection with the content hereof and any such action or inaction. Professional advice is necessary for every case.