Cash Isas remain king despite only being worthwhile for the wealthy

The number of adult Isas that are being used just for cash savings now stands at 76% of all adult Isa subscriptions.

Over 11 million people made use of an adult Isa account between 2018-19, according to the latest figures from HMRC.

That represented an increase of 1.4 million from 2017-18, during which adult Isa subscriptions totalled 10.1 million.

However, while there was a general increase in the use of adult Isas, there was a significant fall in the number of Isas being used for investments. Figures for the 2018-19 tax year show the number subscribing to stocks and shares Isa subscriptions fell by 450,000 compared to a year prior.

As a result, the number of adult Isas that are being used just for cash savings now stands at 76% of all adult Isa subscriptions. In comparison, cash savings Isa subscriptions accounted for 70% in 2017-18.

The increase comes despite the cash Isa largely becoming redundant and worthwhile only for wealthy savers since the introduction of the Personal Savings Allowance in April 2016. The allowance enables basic rate taxpayers to receive £1,000 of cash interest tax-free each year (£500 for higher rate taxpayers and £0 for additional rate taxpayers).

As a result of this allowance, the cash Isa tax break has become less relevant. Savers can now have £100,000 in a taxable account offering 1% interest and will not have to pay a single penny of tax.

But despite this for Isa users, cash appears to be king. An obvious explanation for the decline in stocks and shares Isa use can be explained by market volatility around the uncertainty of Brexit in the 2018-19 tax year.

This is certainly the view of Myron Jobson, personal finance campaigner at interactive investor, who says: “Uncertainty around what Brexit might look like in the 2018/2019 tax year may well have soured investor appetite for stocks and shares Isas, combined with a tough Q4 for markets in 2018.

“Cash savings rates have languished for over a decade since the base rate was cut to help the UK economy recover from the financial crisis. While cash savings is imperative for short-term funding requirements and to serve as a rainy-day pot, those who can afford to lock a portion of their cash away for at least five years could be missing out long term.”

The last time the number of people making use of a stocks and shares Isa fell to such low levels was the tax year for 2007/8.

The data also showed a 5% year-on-year increase in Junior Isa subscription. However, as Laura Suter, personal finance analyst at AJ Bell notes, most parents (70%) have opted for cash savings Junior Isas instead of stocks and shares options. Suter notes: “If you’re locking money up for up to 18 years, you’re in the ideal place to be able to ride out the rises and falls in the stock market, and have the potential to supercharge your child’s savings by getting higher returns.”

Deputy editor Kyle Caldwell recently wrote about having trouble opening a Junior Isa account for his newborn due to coronavirus.