Laith Khalaf, head of investment analysis at AJ Bell, comments: “Savers ploughed £4.2 billion in Cash ISAs in October, the largest inflow since the end of the tax year in April. The bump in contributions likely stemmed from savers acting ahead of the widely anticipated cut to the Cash ISA allowance in the Budget.
“While Cash ISA flows were elevated, one might have expected a bigger dash to use the allowance before the Budget. Perhaps when November’s figures are released we will see another jump in Cash ISA contributions. Savers may well have waited until the last minute to fill up their ISAs, and given the hokey cokey nature of pre-budget policy briefings to the media, who could blame them?
“Savers may also have been banking on the fact that any change to the Cash ISA allowance wouldn’t come in until the end of the tax year at the earliest. That proved to be the case, with the cut now pencilled in for April 2027.
“Plenty of savers probably also aren’t affected by the allowance being cut to £12,000, because it is still sufficient for their annual contributions. In 2022/23, the latest tax year for which HMRC has published data, 28% of Cash ISA contributions were over £12,500 (based on HMRC data and not including those who contributed to Cash and Stocks and Shares ISAs). That gives us some idea of what proportion of savers will be affected by the cut.
“The carve out for over 65s will reduce that number further. Again according to HMRC data for 2022/23, 26% of Cash ISA contributions came from people over the age of 65 (excluding those who contributed to Cash and Stocks and Shares ISAs). Putting those two numbers together, that suggests somewhere in the region of 21% of Cash ISA savers will be affected by the cut. That’s probably an overestimate because it assumes contributions are distributed evenly across age groups, though it seems plausible that the over 65s have a greater propensity to save more into Cash ISAs than younger generations.
“A survey conducted by AJ Bell earlier this year found that just one in five Cash ISA savers would react to a cut to the Cash ISA allowance by investing more in the UK stock market, which is the chancellor’s stated aim by pursuing this policy. Applying that to the 21% of Cash ISA savers who might be affected by the cut, that suggests somewhere in the region of 4% of Cash ISA savers will be affected by the allowance cut and will then go on to invest more in the UK stock market as a result.
“This hardly adds up to a dramatic cultural shift in the UK away from cash saving towards investing. It may well add to the Treasury’s coffers though. 51% of respondents to our survey said they would react to a cut to the Cash ISA allowance by simply holding more money in taxable savings accounts. From the chancellor’s point of view this was a win-win policy, resulting in an outside shot at boosting investment into the UK, but with a safety net of higher tax receipts if not.”
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