Prime Minister Rachel Reeves reportedly plans to announce plans to reduce cash ISA annual allowances later this month.
According to the Financial Times, government sources confirmed that the prime minister intends to lower the cash ISA allowance, the first major change in ISA restrictions since the 2017-18 tax year.
Discussions about the exact reduction in cash ISA are believed to be ongoing, but the move is part of a strategy to encourage people to invest in more savings. Reeves is expected to announce the news in her mansion speech on July 15.
The ISA allows individuals to save or invest £20,000 per year tax-free, although specific types of ISA have different restrictions.
The plan is believed to be designed to encourage people to invest more money in the stock market in a bid to get higher returns in the long run.
What is a cash ISA?
Cash ISA (Personal Savings Account) works like a normal savings account, but a more efficient way to save.
It is considered a stable and reliable way to save because your funds don't invest in the stock market (and therefore lose market volatility) and you don't pay income tax on the interest you get.
There are two main types of cash ISA: variable and fixed interest rate. Fixed Rate Cash ISA offers a slightly higher interest rate than variable rates, but generally you cannot withdraw cash before the end of a fixed period.
ISA has four other types of ISAs: Stock and Stock ISA, Innovative Finance ISA, Lifetime ISA and Children Primary ISA.
HMRC statistics show that in the 2022-23 tax year, more than 7.8 million people own cash ISAs, while stock and stock ISAs (also known as Ispits Isas), while 3.8 million people own cash.
Data from the Bank of England showed that the reserves put a record £14 billion in cash in April this year, the highest amount recorded since the product was launched in 1999.
What changes may occur?
Each tax year, you can save up to £20,000 in one ISA or allocate allowances across multiple ISAs without paying any tax on their interest or income.
Depositors can choose how to allocate tax-exempt restrictions between any of the accounts outlined above.
The proposed changes will mean savers will limit the money they can put into cash ISA, reportedly reducing £4,000 to £5,000 a year.
It is not clear whether any other type of ISA will be affected.
Reeves insists that she has no plans to reduce the £20,000 limit that can be put into the ISA annually, saying: “Very few people can save £20,000 a year…We still hope people can save, and I certainly won't reduce that limit.”
However, she did not rule out limiting tax-free investments to cash ISA at the time.
What impact will this have on savers?
It is unclear how this will affect saver habits, but it may attract investments in riskier ISAs or prevent people from investing together.
Sarah Coles, of Hargreaves Lansdown Financial Services, believes that the changes may give investors less money to move from savings to investments.
“Cash ISA is usually the first port of call when people start, and when they find their feet, they often turn to investment gradually.
“Reducing allowances means that savers are less available when they are satisfied with their investments and can effectively reduce investment rather than increase investment.”
Why did Rachel Reeves do this?
Reeves said the changes would bring better returns for UK investors, and some changes in the city believe that these changes will attract growth for UK companies.
“Whether it’s in pensions or in daily savings, I hope people get better returns.
“Currently, when it can be invested in stocks, stock markets and bring better returns to people, put a lot of money into cash or bonds.
“But I definitely want to keep the £20,000 tax-free investment limit that people can enact each year.”
According to Gov.uk, at the end of the 2022/23 tax year, British adults held a total of £72.9 billion in the ISA, which could represent an increase in tax returns and help balance government books.
Hopefully, the City of London will benefit by encouraging more investment in stocks and stocks.
British investment bank Peel Hunt recommends lowering the cap of cash ISA from £20k to £5,000 to facilitate transfer of savings to stocks.
“Given the long-term record of poor stock performance and cash, savers will benefit from investment in stocks,” a report from the bank said.
What do critics say?
Martin Lewis said the changes would be a “big mistake” if the prime minister introduced them later this month.
Lewis wrote on X that cutting cash ISA is a form of “people who are out of economics” and although he favors encouraging people to invest, it is not “the way to do so.”
“My suspicion is that for many people who use cash ISAs, this only leads many to have to pay more tax on their relatively trivial savings interest without an epiphany and think 'I will only fill the rest of my ISA allowance with the rest of my investment'” he wrote.
“I would be disappointed if the Prime Minister chose to listen to the big investment companies in the city and closed many construction societies and consumer groups that they said were not a good route.”
A recent survey commissioned by investment platform AJ Bell found that only one in five savers would invest more in the UK stock market if they cut their cash ISA allowances.
Laura Suter, director of personal finance at AJ Bell, said: “There is no doubt that the cuts in cash ISA allowances will bring guns to the UK stock market in the long run.
“(Of more than half of the people surveyed) will only put their money into a taxable savings account. Good news for a prime minister who is eager for money, the London Stock Exchange has less money.”
“Simply changing the cash portion of ISA is unlikely to have the expected impact, i.e. gain more investment,” said Andrew Prosser, head of investment at InvestEngine.
“The two age groups are most likely to contribute cash ISAs for ages 25-34 and over 65. Young savers are likely to use cash or lifelong ISAs to fund large-scale lifelong purchases such as home deposits, while older savers may use them to fund short-term spending needs.
“None of these groups wants to see the value of their funds fluctuate like investments. They are more likely to just continue to hold the same amount of cash, but more cash will exceed the ISA tax package.”
