Why Inflation and Interest Rates Could Spell Danger for Cash ISA Savers in 2025

There are four different types of ISAs available to savers in the United Kingdom: Cash ISAs, Stocks and Shares ISAs, Innovative Finance ISAs, and Lifetime ISAs.

UK residents can open and deposit money into as many ISAs as they like each tax year, except for Lifetime ISAs, which limit savers to one per tax year. In addition, savers can choose to divide their annual ISA allowance of £20,000 across any of their accounts, as long as they only put a maximum of £4,000 into a Lifetime ISA. 

If you are investing some or all of your annual ISA allowance into a Cash ISA, then it is essential to know why inflation and interest rates could spell danger for you and other savers in 2025.

What Are Cash ISAs?

A Cash ISA is a type of UK savings account that is available to all residents aged 18 and over. When you open your Cash ISA, you can deposit up to £20,000 each tax year (from 6th April to 5th April) into it - based on the annual ISA allowance. You can also pay into more than one Cash ISA a year. 

You won't pay tax on any of the interest you earn in your Cash ISA, as long as you stick to the allowance rules. Interest will be paid annually or monthly, depending on the type you pick. There are two types of Cash ISAs to choose from:

• Fixed Rate. Your interest rate will stay the same (be fixed) for the term of your Cash ISA, and there are likely to be limits on how often you take money out of your account.
  

• Variable Rate. Your interest rate is likely to change (be variable) during the term of your Cash ISA, and you will be able to make more withdrawals from your account.

The interest you earn in your ISA won't count towards your Personal Savings Allowance (PSA). This is the total amount of interest you can earn each year across all of your bank and building society accounts without paying tax, but it does not include any ISA accounts.

Will Inflation and Interest Rates Put Cash ISA Savers In Danger In 2025?

January 2025 became the third month in a row where savers suffered from a real term loss on Cash ISA savings. The real terms loss of 1.23% was due to Consumer Price Index (CPI) inflation hitting 3% and the monthly interest rates on Cash ISA deposits dropping to 1.77%. 

Unfortunately, after warning Brits that inflation could continue to rise to 3.7% by the autumn, The Bank of England cut interest rates to 4.5% in February 2025. This means many ISA providers may lower the interest rates on their Cash ISAs, giving savers less interest on the money they have deposited into their accounts.

If inflation continues to rise and becomes higher than the interest rate earned on Cash ISAs, then a saver's purchasing (or buying) power is likely to weaken.

For example, if Cash ISA interest goes up to 4.5%, but UK inflation is at 5%, the real growth of your ISA savings is negative. Despite having more money in your account, the interest earned in the Cash ISA is less likely to keep pace with the rising prices of goods and services due to inflation. 

Could Cash ISAs Be Scrapped?

Chancellor of the Exchequer Rachel Reeves has reportedly ruled out scrapping Cash ISAs altogether. However, it is possible that a reduction in the amount of money people can contribute to Cash ISAs and a two-tier system for cash and shares will be introduced.

Scrapping Cash ISAs would not only upend many people's financial plans but would also affect the UK economy. The money stored in Cash ISAs is beneficial for the economy because banks and other providers often loan it out to households and businesses.

Wrapping Up

We recommend that Cash ISA savers consider transferring to a Stocks and Shares ISA because these accounts have a better chance of keeping pace with inflation.

If you are interested in transferring to a Stocks and Shares ISA and protecting your purchasing power, then contact the provider of your Cash ISA to ask for the transfer process. The provider might ask you to fill out a transfer form or request the transfer in writing.