Rachel Reeves has confirmed she is considering putting new curbs on cash ISAs in a bid to encourage savers to put their money into more productive – but riskier – investments.
The Chancellor promised to “create more of a culture in the UK of retail investing” when asked whether she would change the tax rules at the next Budget.
Some City firms have been pushing for cash ISAs to be limited or even abolished so that tax-free savings are channelled towards the stock market instead.
But savers have expressed concern that if the popular accounts are limited, they will have no way to get risk-free returns that are not subject to tax.
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.
The i Paper reported last week that the Treasury was considering reducing the maximum annual amount you can save in a cash ISA – and had not ruled out abolishing them altogether. One idea floated by investment firms is to cut the maximum to £4,000.
Asked about the idea on Thursday, Reeves said: “It’s really important that we support people to save, to achieve their aspirations. At the moment, there is a £20,000 limit on what you can put into either cash or equities, but we want to get that balance right.
“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.”
The Treasury refused to comment on a report in The Daily Mail which claimed that in a meeting this week, the Chancellor told companies she would not scrap the Cash ISA altogether.
Ministers have long been concerned about the fact that hundreds of billions of pounds are sitting in bank accounts without being invested in productive businesses.
Shaun Moore, a tax and financial planning expert at Quilter, said: “The prospect of a £4,000 cap on cash ISAs would mark a significant shift, but it wouldn’t be unprecedented. As recently as 2014, the ISA system operated a distinction between limits between cash and stocks and shares, before being reformed into the structure we have today where one can choose how to allocate within the overall limit.
“Returning to a similar approach isn’t necessarily a bad thing. It could encourage more people to invest, which has historically delivered better long-term returns and supports economic growth.”
Tom Selby of AJ Bell added: “Our long-held view is that government focus when it comes to ISA reform needs to centre on simplification and encouraging more people to invest for the long term, rather than restricting choice.
“While the Government’s desperation to deliver growth and increase investing in the UK is laudable, it is hard to imagine any future ISA framework that doesn’t at least allow investors to hold a decent chunk of their fund in cash. Limiting annual cash ISA limits may seem superficially attractive but there is no guarantee this money would then be deployed in long-term investments.”
Sarah Coles, head of personal finance at Hargreaves Lansdown, said: “The idea of cutting the cash ISA limit to encourage more investment would be using a square peg to plug a round hole. A major part of the issue is that not enough people have the confidence to invest.
“The [Financial Conduct Authority’s] Advice Guidance Boundary Review is under way, looking into how better to guide people to good financial decisions without having to pay for advice. This will mean businesses can offer more targeted support and guide people to move long term savings into investment. This would be a huge step forward and will be more effective than tinkering around with ISAs. If the ISA allowance was cut – and it’s a big if – the most likely outcome would be more diligent savers being exposed to tax.”
Jason Hollands, managing director of Bestinvest by Evelyn Partners, said: “Capping cash ISAs as a proportion of the current allowance is a very credible threat. Anything that reduces choices and flexibility is a step backward in my view.”
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, more than 18 million people have one, and 2024 was a record year for the market, with savers depositing more than £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.
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.
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 that allows basic rate taxpayers to earn £1,000 in interest tax-free annually, and higher-rate taxpayers to earn £500 tax-free. If people did not 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 are not when taking money from a cash ISA unless taking money from a fixed-term option before the period ends.
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