Death of the Isa millionaire? Savings experts give their verdict on a potential £500k cap on tax-free pots

Could Rachel Reeves cap the amount that savers and investors can salt away into Isas in her first budget on 30 October?

The future of tax-free accounts is in doubt, as it has emerged a cap of £500,000 was previously floated by the now Chancellor in a column she wrote for The Independent in 2016. 

It has stirred fears the Chancellor could reform Isas by imposing a limit on the amount of savings that can be held in them – and as such, could spell the death of the Isa millionaire.

Some of the most dedicated Isa savers have racked up pots worth more than £1million. There are over 4,000 of these ‘Isa millionaires’, HMRC data reveals and the average Isa millionaire has a pot of £1.39million.

When it comes to protecting wealth, Isas are the bedrock on which diligent savers can build up a nest egg without having to worry about paying tax on their savings.

They allow savers to stash away up to £20,000 each year tax free – and many have built up chunky pots in the last 25 years, away from the clutches of the taxman. 

There is currently no limit on how much money savers can amass in an Isa in total, as long as they stick to their annual limit.  

Savers putting in half the annual Isa limit each year – £10,000 – with average growth of 5 per cent would breach a £500,000 Isa cap in under 25 years. 

For those who max out their Isa each year and with 5 per cent growth, half a million pounds would be reached by roughly the 16th year.  

This is Money asked four savings experts how likely it is the Government could impose a lifetime cap on Isas in the Budget and what other changes could be in store for Isas.

In July – shortly after the election – we asked the same experts whether Isas could be in the firing line for a Labour tax raid.

Sarah Coles, head of personal finance at Hargreaves Lansdown, said: ‘The Isa gives people a simple way into savings and investments, without having to get to grips with potentially thorny tax implications.

‘Part of its appeal is the simplicity of an annual allowance controlling what’s paid in, so there’s no restriction on how diligently people can save over the years or how successful their investments can be. It also benefits from reliability – so people knew where they stand with their Isa investments.

‘Introducing a lifetime limit would demolish both. It would be the worst form of retrospective taxation, and risks irreparably damaging the Isa’s reputation as the go to place to build financial resilience.

‘Hargreaves Lansdown has 1,240 Isa millionaires, which goes to show just what’s possible when diligent regular investors make the most of their opportunities. Adding new limits could mean the death of the ISA millionaire.

‘Even if you’re nowhere near maxing out your Isa allowance, you would still run a serious risk of busting a £500,000 allowance over the long term.

‘If you put in just half of your annual allowance – £10,000 – and you got typical investment growth of 5 per cent, you’d tip over the allowance after 24 years and 8 months. It means tax on investments would become a major worry for far more people.’

Andrew Hagger, founder of website MoneyComms said: ‘I’m sure a lifetime cap on Isa balances is one of the options the Chancellor has considered in her cost cutting drive – it would probably create less of an outcry than slashing the annual £20,000 Isa tax-free limit.

‘There is potential for the Isa allowance of £20,000 (in place since 2017/18 tax year) to be cut, but I’d be surprised if it happened.

‘It’s more likely there would be some tinkering around the edges with the likes of the much-criticised Lifetime Isa.

‘Isas could be taxed, but again I’d be astonished if that was to happen. The Isa has almost become a permanent fixture for hoards of cash savers and equity investors in the 25 years since being introduced by Gordon Brown back in April 1999.

‘With savings interest rates still relatively buoyant, increasing number of savers have exceeded their tax-free personal savings allowance and become more reliant on Isas to keep their interest income away from the taxman, so for the rug to suddenly be pulled would cause much aguish and anger amongst millions of savers.

‘I can’t see such a radical and unpopular move being made so early in the tenure of the new Labour government.’

James Blower, founder of website Savings Guru said: ‘I don’t expect the Isa allowance to be cut under a Labour government.

‘I think allowances will continue to be frozen, as they have been under the Conservatives since 2016/17, which in effect is a stealth tax increase.

‘With the cut to the Winter Fuel Allowance, I think this rules out any chance of even a modest increase in allowances’.

‘I think, in the medium term, Labour will try and simplify the Isa system but they have bigger priorities for now and I’d expect any significant changes to come in for the 2026/27 tax year at the earliest.

‘I really don’t see Labour taxing Isas – what we’ve seen from Sir Keir Starmer so far is that he has moved Labour to the centre ground of politics and tried to build trust to win election.

‘This approach has worked for him and Labour and I don’t see him wrecking this by making a move, such as taxing Isas, capping or limiting them, which would be incredibly unpopular and bring in (relatively) very little extra taxation.

‘There are easier more popular wins for Labour to increase taxation in my opinion.’

Rachel Springall, finance expert at Moneyfacts Compare said: ‘Isa allowances could be revisited in the Budget, and savers might be hopeful for the Isa allowance to rise from £20,000, as it has not changed for years. 

‘Isas alone may not be able to address the lack of savings for consumers with low income, and Labour might think of ways to improve this situation.

‘Labour introduced Isa’s 25 years ago, and the aim was to encourage people to save or invest their money, free from tax. 

‘However, there is a possibility Labour could review how tax could work on individuals with big Isa pots, such as capping the amount which can be tax-free. 

‘The money earned from tax could then be spent on other initiatives, such as the Help to Save scheme.

‘One tax-free allowance the Conservative Party introduced was the Personal Savings Allowance in 2016, and that is something that could change in the future. 

‘If this were to be withdrawn by Labour, this could lead to a spike in savers turning to use their Isa allowance, which protects their savings interest from tax.’