Recent Budget reforms will reduce cash ISA limits and increase taxes on savings income, pushing savers toward stock market investment. Here, we explore what the changes mean in practice—and how to ensure you’re making the most of your ISA allowance.
When Chancellor Rachel Reeves took to the floor on Budget Day (26 November 2025), cash Individual Savings Accounts (ISAs) were just one of the many targets widely expected to take a hit in her efforts to stimulate growth.
In the event, things could have gone worse for cash savers; however, most still saw a 40% reduction in their annual tax-free allocation.
Under the new reforms, the overall maximum ISA allowance remains at £20,000, but from April 2027 cash ISAs will be limited to a maximum £12,000 per year for under-65s¹, leaving £8,000 earmarked exclusively for stock market investments. Those aged over 65 will retain the option of putting the full £20,000 into a cash ISA.
So, for the millions of UK taxpayers who see the long-term benefits of building a nest egg in an environment where their money grows and can be withdrawn completely free of tax, these measures could serve as an incentive to channel more (or all) of their allowance away from cash and towards a stocks and shares ISA.
The tax attractions of an ISA over a taxable account were further enhanced with the news that from April 2026 income tax is to go up by 2% on dividends received and on savings interest from April 2027².
Cash or Stocks and Shares ISA?
When she made her announcement, the Chancellor was thinking primarily about boosting UK economic growth by encouraging people to divert more of their tax-free savings into investment in companies – particularly UK companies.
However, her speech also highlighted the long-term financial advantages for ordinary investors of stock market investment over savings accounts. “Someone who has invested £1,000 a year in an average stocks and shares ISA every year since 1999 [when ISAs were launched] would be £50,000 better off than if they had put that same money into a cash ISA,” she said³.
That superior return is a reflection of the element of risk attached to stock market investment. As any professional investor will remind you, in the short term – under five years, say – share values tend to be more volatile and may rise or fall. Over longer time periods, while there is no guarantee, historical trends show that stocks are more likely to increase in value.
If you’re likely to need the money in just a few years, therefore, a cash ISA remains the sensible option: the risk of capital loss is minimal and your earnings are undoubtedly more predictable over that kind of timescale, though they may struggle to keep up with inflation in real terms.
In contrast, over the longer term economies tend to grow and markets tend to rise - hence the emphasis on “time in the market” as a key prerequisite for successful ISA investing.
Compounding benefits
Another key aspect of investment, and especially to the idea of investing for decades rather than years, is the notion of reinvesting earnings to enable compounding.
Not only does the value of each individual unit of investment tend to rise over the years, but in many cases it pays a dividend that can be reinvested to buy more units. These in turn produce their own dividends, and so on, with the compounding process tending to gather momentum as the number of units increases.
To take a very simple example, someone paying £100 a month into an ISA investment returning a hypothetical rate of return of 5% a year (note that in practice it could be more or less than this) for 30 years would earn dividends worth £828 over the first five years. But between years 25 and 30 the value of dividends generated would have risen to more than £18,000⁴.
(This ‘magical’ phenomenon works on the interest earned in savings accounts too, but interest is all you get: there is no potential capital growth to enhance total returns over the long term and keep them ahead of inflation.)
So, provided time is on your side, it really does make financial sense to employ a stocks and shares ISA for your allowance. That, of course, raises the question of where to invest.
Investment trusts for your Stocks and Shares ISA
Investment trusts are an obvious choice for long-term investors, particularly when all growth is tax-free. The bottom line is that on average, investment trusts tend to outperform both the broader stock market and the average open-ended fund over the long term⁵.
More specifically, analysis by the Association of Investment Companies finds that over 10 years to end October 2025, trusts lead the field in 11 out of the 15 sectors where there is a comparable open-ended fund sector⁶.
This is partly due to the way trusts are structured. First, because they are listed and trade on the stock exchange, it’s the share price that fluctuates according to supply and demand.
The actual value of the underlying assets (net asset value or NAV) is not directly affected, which means investment trust fund managers - unlike open-ended fund managers – can invest for the long term (in less liquid assets, for example) without having to worry about catering to short-term inflows or outflows of investor cash.
Moreover, investment trust shares typically trade at a discount to NAV, so if they become more popular with investors and the share price rises, there’s an additional performance ‘kick’ for existing investors as the discount to NAV reduces - regardless of performance of the portfolio itself.
Trusts can also borrow to invest, which again can enhance shareholder returns if those investments prosper.
These attributes can of course also work against investors, so in the short term investment trusts tend to be rather more volatile than open-ended funds. But on a long view – in a stocks and shares ISA, for instance – they bring meaningful advantages in terms of returns.
A further benefit is that, unlike funds, which have to distribute all their portfolio earnings as dividends each year, trusts are allowed to retain up to 15% of earnings to create reserves. In leaner years they can then draw on those reserves to ensure shareholders can rely on a steady investment income from year to year.
Indeed, there’s a growing culture of ‘dividend growth’, whereby trust boards to go considerable lengths to avoid cutting payouts and ideally raising them each year. Again, for income-focused investors (and those impressed by the power of compounding too), such reliability is a big plus.
Our investment trust range
Backed by 150 years of experience, J.P. Morgan Asset Management’s range of investment trusts includes many with long and impressive track records; all have a steady focus on bottom-up stock-picking for high quality companies with robust management and a strong future, bought at a sensible price.
Whatever your choices from our investment trust stable, the recent Budget highlights the importance of considering long-term, tax-free investment options as a way to steadily build funds for your financial future.