Chancellor George Osborne has announced a "radically more flexible Isa" by allowing people to repay in any money they withdraw from their accounts from this autumn.
Delivering his 2015 Budget, he said: "In two weeks' time the changes I've already made mean people will be able to put £15,240 into an Isa [from 6 April 2015].
"But if you take that money out – you lose your tax-free entitlement, and so can't put it back in. This restricts what people can do with their own savings – but I believe people should be trusted with their hard earned money."
"With the fully Flexible Isa people will have complete freedom to take money out, and put it back in later in the year, without losing any of their tax-free entitlement."
To qualify, repayments must be made in the same financial year as the withdrawal.
Osborne said the rules will come into effect from this autumn, at which point the range of investments eligible for inclusion within a stock and shares Isa will be expanded.
This is likely to include peer-to-peer (P2P) lending, which the government has been consulting on since September 2014. The P2P industry had been hoping for a separate P2P Isa.
Julie Hutchison, savings and tax expert at Standard Life, said: “The proposal for more flexibility around taking withdrawals and replacing the money in a cash Isa – in the same tax year – is welcome news for consumers.
"It will make it easier for consumers to commit to set-aside some of their hard-earned money and to start to build an emergency fund, knowing they can take money out, and top-up their Isa again, in the same tax year.”
However, Adrian Lowcock, head of investing at Axa Wealth, said: “The boost of flexibility to cash Isas is lost with the introduction of the Personal Savings Allowance in April 2016 on the first £1,000 of interest. This makes cash Isas unnecessary for 95% of people.”
He was referring to the fact that the new allowance is expected to take 95% of taxpayers out of savings tax altogether, as confirmed by the Treasury.
Savers would need to have £50,000 in an account paying 2% to generate £1,000 gross interest a year.