New £12,000 cash ISA cap could leave savers £300,000 better off over time
Savers are being warned of a major shake-up to their ISA options from April 2027 as the Chancellor prepares to cap annual cash ISA contributions at £12,000.
The restriction forms part of wider reforms outlined in the recent Budget and is expected to reshape how millions of households use their yearly ISA allowance.
Those who use the new £8,000 tax free allowance for stocks and shares ISA could ultimately be £300,000 better off though, compared to just investing in the cash ISA.
Fresh analysis from wealth management firm Murphy Wealth suggests the changes could ultimately benefit those willing to diversify their savings.
The firm found savers who divide their £20,000 annual allowance between the new £12,000 cash limit and £8,000 in stocks and shares could accumulate around £300,000 more over 20 years than those who place the entire sum in cash.
The findings challenge long-standing saving habits across Britain, where cash remains the favoured option despite typically delivering lower long-term returns.
Murphy Wealth based its calculations on the historical performance of the MSCI All Country World Index, which has delivered average yearly returns of 10.82 per cent since 1988.
The firm noted the figures do not include investment charges, which would reduce real-world returns.
Money Saving Expert data shows the top fixed-term cash ISA currently pays 4.3 per cent interest.
Murphy Wealth said such rates often fall sharply once introductory fixed terms end, reducing long-term growth potential for savers who keep their ISA contributions entirely in cash.
The analysis assumes savers continue to use their full £20,000 annual allowance over the full two-decade period.
By investing in the stocks and shares ISA rather than the cash ISA, savers could benefit
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GETTYUnder the new £12,000 cap, this would mean depositing that amount into cash ISAs and investing the remaining £8,000 into stocks and shares.
According to the projections, savers who keep their full £20,000 allowance in cash ISAs could build £640,867.20 over 20 years.
Those who adopt the split approach of £12,000 in cash and £8,000 in stocks and shares would see their pot grow to £942,061.23.
This would leave them £301,194.03 better off than the cash-only route.
The most investment-focused strategy, placing the full £20,000 allowance into stocks and shares each year, could result in a total of £1,393,933.13 across the same timeframe.
This would more than double the projected cash-only outcome, though investing carries higher volatility and risk.
ISA growth comparison over 20 years
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Murphy Wealth/Copilot
The calculations assume consistent annual contributions and rely on long-term historical return rates.
Recent HMRC figures for the 2023/24 tax year demonstrate the UK’s persistent preference for cash.
Cash ISA accounts rose to 9.94 million, an increase of 2.1 million in a year.
Stocks and shares ISAs grew by 283,000, reaching 4.09 million accounts.
However, investment-focused ISAs hold significantly more value overall. Stocks and shares ISAs represent just 27 per cent of all accounts but hold 59 per cent of the total ISA market value.
This equates to £511billion compared with £360billion for cash holdings.
The average stocks and shares ISA contains £124,939, nearly four times the £33,217 held in the typical cash ISA.
The figures show how those who invest have tended to accumulate larger balances than those relying solely on cash savings.
Adrian Murphy, chief executive of Murphy Wealth, said: “The UK is a nation of cash savers, so a lot of people will understandably see the £12,000 limit on cash ISA contributions as a negative.
But, if they continue to maximise the allowance and use the remaining £8,000 to invest, they could end up a lot better off for it”.
He sought to address common concerns about investment risk.
Stocks and shares ISAs tend to yield higher returns than Cash ISAs over time
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GETTY / GB NEWSMr Murphy said: “Many people see investing as risky.
While stocks and shares can be volatile, and there is no such thing as a guaranteed return, it’s also worth remembering that investing has tended to provide higher returns over the long term”.
He pointed to HMRC data showing the strong role of investing in long-term wealth accumulation.
“94 per cent of the UK’s ISA millionaires got there through stocks and shares accounts – and none built that level of wealth through cash alone”.
