Tax-efficient Isas jumped in popularity in 2022-23 amid improved rates

Isas have surged in popularity in the higher interest rate environment, according to annual HM Revenue and Customs (HMRC) figures.

About 12.5 million adult Isa accounts were subscribed to in 2022-23, up from 11.8 million in 2021 to 2022.

The number of cash Isas subscribed to increased by 722,000, while the the number subscribing to stocks and shares Isas decreased by about 126,000.

Some 1.25 million Junior Isa accounts were subscribed to in 2022-23, up from 1.21 million in 2021-22.

Isas are a tax-efficient way to save and finance experts suggested that savers could be looking for ways to make their money work harder.

According to financial information website Moneyfactscompare.co.uk, the average easy access cash Isa paid 0.26% interest in December 2021, but by September 2022 it was 0.92%, in September 2023 the average was 3.04% and in September 2024 it is 3.29%.

Savings rates rose as the Bank of England base rate increased. The base rate was recently cut by 0.25 percentage points and on Thursday the Bank held the rate at 5%.

Rachael Griffin, tax and financial planning expert at wealth manager Quilter said: “The lure of higher interest rates has resulted in a marked pick-up in the number of cash Isa subscriptions.”

She continued: “However, given the Bank of England has now started cutting interest rates, we are seeing a significant shift in the savings and investment landscape.

“For years, savers have enjoyed the benefits of higher interest rates, but we are now seeing a turning point which requires a reassessment of savings strategies.”

Ms Griffin said investing in the stock market “requires a long-term horizon – a minimum of five years, ideally 10 years or more.”

Myron Jobson, senior personal finance analyst at interactive investor, said: “As inflation soared and household budgets tightened, the need to maintain short-term financial resilience also took precedence for many households.

“This shift is marked by a decrease in subscriptions and amounts paid into stocks and shares Isas and a corresponding increase in cash Isas.”

Adam Thrower, head of savings at Shawbrook said: “Smart savers are waking up to the fact that making their money work harder is more important than ever.”

Elsa Littlewood, private wealth tax partner at BDO, said: “The latest figures show that a growing number of savers are taking advantage of the tax sheltering opportunities offered by Isas.

“However, with the latest available figures showing that Isas are costing the Exchequer almost £5 billion a year in tax relief – and with recent warnings about a painful Budget ahead – cutting this cost by reining in Isa benefits for wealthy investors might be seen as an easy way to help balance the books.”

Daniel Hough, a financial planner at RBC Brewin Dolphin, said: “The large rise in the number of cash Isas during 2022-23 is understandable, given interest rate rises meant the returns on offer were significantly higher than they were only a year or two before.

“But what savers should appreciate is that, as we have seen this summer, these rates will likely come down in time and the returns available on cash will follow.”

He said market volatility in 2022 going into 2023 “may have spooked some savers and they have decided they would prefer to keep their savings in cash”.