Reeves to cut cash Isa allowance
Rachel Reeves is poised to unveil a cut to the tax-free cash Isa allowance in a bid to encourage British savers to invest in London-listed firms and breathe life into the UK’s ailing capital markets.
According to the FT, the Chancellor will use her upcoming Mansion House speech to announce a lowering of the current £20,000 cap that savers are allowed to put in cash tax-free as part of the individual savings account wrapper.
It’s the latest twist in a long-running debate over cash Isas that has divided the City.
The move’s cheerleaders argue that the £300bn pool of tax-free cash savings would be better put to use if it were invested in UK companies. Doing so would not only improve savers’ returns in almost all cases – over the long run – but provide capital-starved firms with a much-needed boost of investment after suffering years of outflows, its advocates say.
Last week, Investment firm IG Group launched a “Save our Stock market” initiative, which, among other proposals, suggested scrapping the cash Isa altogether.
Meanwhile Charles Hall, a longstanding backer of reform to the limit, told CityAM: “It makes sense for the Chancellor to address the limits on Cash ISAs to encourage savers to invest in products with higher returns.
“We should also ensure that taxpayers’ money is focused on encouraging investment in UK companies.”
But a host of high-profile voices in the Square Mile have also railed against the change. The boss of investment platform AJ Bell, Michael Summergill has said he was “fundamentally opposed” to reducing the amount savers could hold in cash Isas, and that any reduction in the overall would have a “negative” impact on savers without having “the desired effect of getting people investing”.
The platform’s own research found that just one in four savers would channel additional funds into UK equities via the parallel stocks and shares Isa, if the government changes. The chief executive of the Building Societies Association has also previously said the cash wrapper “forms a key part of many people’s savings“.
‘Carrot not stick’
Sarah Coles, head of personal finance, Hargreaves Lansdown said:
“Cash ISAs are often a first port of call when people are starting out, and they’ll often gradually move over into investments as they find their feet. If the speculation is accurate, it means they’ll have less available to transfer into stocks and shares ISA – effectively reducing investments rather than boosting them.
This is an issue which requires a carrot not stick approach. We know through extensive research that the barriers to investing are behavioural, so it’s through encouragement and increased confidence that we will all increase the number of retail investors.”
The exact allowance that Reeves will settle on is not yet known. She has previously ruled out lowering the overall £20,000 Isa limit, but has stopped short of publicly ruling out cutting the cash Isa wrapper specifically. Any major cut would represent the largest overhaul of what is the UK’s marquee saving wrapper since its introduction in 1999 under then Chancellor Gordon Brown.
The Treasury did not immediately respond to a request for comment.