Scrap Cash ISAs to fund £1,000 investment grant for every new baby

Scrap Cash ISAs to fund £1,000 investment grant for every new baby and avoid ‘fiscally illiterate’ CGT hike, says FTSE 100 firm IG

• Scrapping Cash ISAs could generate up to £610m a year by 2032-33, covering most of the £700m annual cost of a £1,000 investment grant for every UK-born child
• Government effort to nudge savers into investing isn’t cutting through: Cash ISA subscriptions rose by £26bn in 2024-25 vs £6bn increase in Stocks & Shares ISAs
• IG also urges Chancellor to avoid CGT hike that could cost Treasury almost £8bn if levelled with income tax

Four weeks from the Autumn Budget, FTSE 100 investing and trading platform IG is calling for a radical rethink of how the Government drives financial resilience, including scrapping Cash ISAs and using the resulting tax receipts to help fund a £1,000 investment grant for every UK-born child. The business is also warning the government against a potentially loss-making CGT hike.

IG modelling suggests that closing Cash ISAs to new contributions could raise up to £610m a year by 2032-33. This additional revenue should be used to fund the majority of the estimated £700m annual cost of giving every UK-born child £1,000 to invest in a JISA.

The proposal would not involve taxing existing Cash ISA balances. From April 2027, no new money would be paid into Cash ISAs, while existing balances would retain their tax-free status.

Bank of England figures show households added around £48bn net to Cash ISAs in 2024-25, which IG uses as the annual amount in its modelling. IG assumes 51% of this would instead be held in taxable savings accounts, based on research into how Cash ISA holders would respond if the products were abolished, and applies an effective 17% tax rate based on the income profile of Cash ISA subscribers. The modelling assumes savings rates ease from 3.5% to 3.25%.

The call comes as Cash ISA contributions continue to dwarf growth in Stocks & Shares ISAs. Cash ISA subscriptions increased by £26.1bn in 2024-25, up 37.5% year-on-year, compared with a £6.1bn increase in Stocks & Shares ISA subscriptions. Cash accounted for 64% of all adult ISA accounts subscribed to during the year.

IG argues that the continued gulf between money going into Cash ISAs and Stocks & Shares ISAs demonstrates the need for a more fundamental shift in incentives if the Government is serious about moving more household wealth into productive investment.

Alongside this, IG is proposing a £1,000 investment grant for every UK-born child, invested through a Junior ISA in a diversified fund rather than held in cash. At current birth rates, around 700,000 children would become investors every year, with the scheme costing the Exchequer around £700m a year.

IG is also calling on the Government to avoid what it describes as a ‘fiscally illiterate’ increase to Capital Gains Tax. Previous IG analysis found that equalising CGT rates with income tax could reduce Exchequer revenues by approximately £7.8bn a year, as higher rates could discourage investors from selling assets, reducing taxable disposals and ultimately lowering tax receipts. The analysis was based on HMRC’s own methodology on CGT revenue forecasts.

The proposals form part of IG’s wider investing manifesto, which sets out measures aimed at making investing a more habitual part of everyday financial life and encouraging more people to become long-term investors.

Michael Healy, CEO of IG Consumer, said:

“We need to think much more radically about how we get people into investing and get them investing more. For decades, we have built a culture around saving cash. If we want households to build greater financial resilience, we need to make investing a normal part of life.

“Our modelling shows that phasing out Cash ISAs could ultimately generate hundreds of millions of pounds a year – enough to cover most of the annual cost of giving every UK-born child £1,000 to invest.

“Giving every child £1,000 to invest from birth would be a powerful way to normalise investing, with 18 years of compounding growth delivering the investing message in a way that politicians could never manage. At the same time, the Government must avoid making investing less attractive through higher taxes. A fiscally illiterate increase in CGT could discourage investment at precisely the moment we need to be encouraging it.

Notes

Methodology on the Cash ISA revenue modelling

Additional revenue from scrapping Cash ISAs arises only where savings that would have gone into a Cash ISA instead remain in an ordinary taxable account and earn interest above the Personal Savings Allowance.

Bank of England figures show households added a net £48bn to Cash ISAs in 2024-25. IG uses this as the annual amount in its modelling.

The modelling acknowledges that the Government’s planned reduction in the Cash ISA allowance for under-65s from April 2027 could reduce future Cash ISA contributions. However, the Treasury scored the £12,000 cap at zero additional revenue. While total Cash ISA contributions have grown substantially in recent years, IG does not assume any further growth in its modelling and holds the £48bn annual net inflow constant throughout the period. This is intended to provide a conservative basis for estimating the potential additional Exchequer receipts from closing Cash ISAs entirely.

IG assumes 51% would instead be held in taxable savings accounts, based on research by AJ Bell, conducted by Opinium in March 2025, which found that 51% of Cash ISA holders would put their money into a taxable savings account if Cash ISAs were abolished.

The model then estimates the additional interest generated by these taxable savings and applies an effective 17% tax rate, a weighted average calculated from the income profile of Cash ISA subscribers. HMRC data (Table 9 of the Cash ISA policy paper) indicates that Cash ISA money is held across different income bands, with 18% going to savers who pay no tax on their savings interest, 51% taxed at 22%, 23% at 42%, 5% at 47% and 3% at the effective 63% rate in the £100,000 to £125,000 band.

The model assumes savings rates ease from 3.5% to 3.25% over the period. As the policy takes effect from April 2027, no additional revenue is assumed in 2027-28, with receipts building as more savings are diverted into taxable accounts and generate taxable interest. Each year another £24.5bn (£48bn × 51%) goes into taxable accounts and is taxed so receipts rise over time.

The resulting estimated additional Exchequer receipts are:

Additional revenue (£ million, cash receipts) 

Methodology on the CGT hike cost to Treasury

IG’s analysis uses HMRC’s published Capital Gains Tax ready reckoner and behavioural assumptions to estimate the revenue impact of aligning Capital Gains Tax rates with income tax rates.

Current CGT rates on most financial investments are:

• 18% for basic-rate taxpayers
• 24% for higher-rate and additional-rate taxpayers

Under an equalisation model these rates would become:

• 20% for basic-rate taxpayers
• 40% for higher-rate taxpayers
• 45% for additional-rate taxpayers

HMRC states that these “rate changes are non-linear and asymmetrical. For example, doubling the change in revenue from a 5-percentage-point increase does not accurately predict the change in revenue under a 10-percentage-point increase. Very large tax rate rises can reduce exchequer yield due to taxpayer behavioural impacts.”

The principal behavioural effects are:

1. Lock-in – investors become less willing to sell assets when tax rates increase, reducing the number of taxable disposals.
2. Forestalling – investors accelerate disposals ahead of a tax increase, bringing revenue forward and reducing receipts in subsequent years.

HMRC’s published estimates suggest that increasing the higher CGT rate from 24% to 34% would reduce Exchequer revenues by £3.565bn in 2028/29.

Using HMRC’s published data, IG estimated:

• A full-base increase from 24% to 40% would reduce revenues by approximately £6.8bn.
• A full-base increase from 24% to 45% would reduce revenues by approximately £9.5bn.

HMRC Capital Gains Tax distribution statistics indicate that:

• Individuals below the higher-rate threshold account for approximately 5% of taxable gains.
• Individuals between the higher-rate and additional-rate thresholds account for approximately 47% of taxable gains.
• Individuals above the additional-rate threshold account for approximately 48% of taxable gains.

Applying the estimated revenue impacts proportionately across each group gives the following indicative annual impact:

Figures are rounded and intended to provide an indicative estimate based on HMRC’s published assumptions and taxpayer distribution data.