Changes to rules for Cash ISAs look set to be announced within weeks as the Chancellor prepares to unveil plans to reform financial services to boost growth.
Rachel Reeves last month confirmed she is considering putting new curbs on Cash ISAs to try to encourage savers to invest their money elsewhere, such as the stock market.
The change could result in the savings limit for the tax-free ISAs, which currently stands at £20,000 a year, being reduced to push people into putting their money into riskier, but potentially more productive, investments.
The Treasury said it would not pre-empt any announcement from the Chancellor but confirmed all aspects of the savings policy are being kept under review.
Reeves has not ruled out scrapping them entirely. She has, however, been warned by investment experts that doing so would remove the most attractive option for risk-averse savers.
A source pointed to Reeves’s recent comments in which she said she wanted to get “the balance right”.
And it is understood that any announcement around changes to the rules would come from the Financial Services Growth and Competitiveness Strategy, which is due to report in the spring.
The strategy was launched by the Chancellor last year to work with industry insiders in putting forward reform ideas that would boost economic growth.
It would take longer, however, for any ISA reform to be implemented due to the need for legislative changes.
Speaking in late February, Reeves confirmed she was looking at making changes to the tax-free savings rules.
“I do want to create a more of a culture in the UK of retail investing, like what you have in the United States to earn better returns to savers and to support the ambition to grow the economy, creating good jobs right across the UK,” she said.
Any changes are unlikely to be retrospective, meaning that existing accounts would be unaffected. However, it would limit the amount of money that can be put into them each year.
Some argue that introducing restrictions would push savings towards the stock market, which would be more productive for the UK economy.
At the moment individuals can put up to £20,000 a year into either a Cash ISA or a Stocks and Shares ISA, with no income or capital gains tax levied on the profits.
Stocks and Shares ISAs tend to produce much higher returns over time, but are significantly riskier in the short term because the money invested in them can go down as well as up.
Reports have suggested the cash limit could be slashed to as low as £4,000, prompting concern among savers – although a large majority of people already save significantly less than the current £20,000 maximum
The boss of Leeds Building Society warned his staff have been “inundated” with questions from worried customers about the possible changes.
Richard Fearon, chief executive of the UK’s fifth-largest building society, said it had heard from hundreds of its members who had concerns about the potential overhaul.
“Since all the speculation we have heard from hundreds of our members who are opposed to the changes, who are worried about the prospect of having their choices narrowed, and think it’s unfair to have the tax-free incentives removed,” he told the Press Association.
“Reducing or scrapping cash ISAs will not necessarily create any extra investment in the UK – it’s unlikely to. But what it will do is lead to higher tax bills for savers and higher repayments for mortgage holders, so we think it is a bad idea.”
Boosting investment in British companies is a key part of Reeves’s plans to improve the UK’s flagging economic growth, with a number of more technical reforms to market regulation already announced.
Cash ISAs are a popular product that allow people to earn interest on their money without paying tax on it, with a current £20,000 yearly limit.
Currently, over 18 million people have one with 2024 a record year for the market, with savers depositing over £49.8bn – up from the previous record of £47.1bn in 2023, according to the Bank of England.
Stocks and shares ISA also offer a £20,000 annual limit that allows the holder to invest in shares, funds, bonds, and more.
Pros of adjusting allowance
One of the key reasons City officials called for cash ISA tax breaks to be scaled back is to boost investment into stocks. They hope more people would invest in a stocks and shares ISA which, over time, tend to offer better returns for customers. This would also help Rachel Reeves with her growth plans, supporting the City’s equities market.
Stocks and shares ISAs already hold more funds than cash ISAs with the most recent government figures showing that just under 60 per cent of the value of ISAs was in shares and 40 per cent in cash. Encouraging more people to use this version would educate more people in investing and, in many cases, boost their returns – especially as they can often outpace inflation.
With more people investing, a buoyant stock market will boost confidence, helping to build growth – key to Labour’s plans.
Cons of adjusting allowance
Not everyone understands or feels confident in investing. A cash ISA is more simple, and people can cash in their funds without worrying about whether the amount will fluctuate.
If people are unaware of the risks of investing, they could lose money without realising.
Many people prefer to keep their money in cash ISAs as they view it as safer and it is easier to withdraw funds, for example if there is an emergency, so removing this could create stress and confusion about where to put funds.
ISAs are exempt from the personal savings allowance which allows basic rate taxpayers to earn £1,000 in interest tax-free annually, and higher rate taxpayers to earn £500. If people didn’t feel confident opening a stocks ISA, they may end up paying more tax if their money is in another account.
There may be fees for withdrawing from stocks and shares ISA but there generally isn’t when taking money from a cash ISA unless taking money from a fixed-term option before the period ends.
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