Rachel Reeves has backed down from controversial plans to cap tax-free cash ISA savings, following a fierce backlash from building societies and consumer campaigners.

The Chancellor had been expected to announce a cut to the current £20,000 annual allowance for cash ISAs during her Mansion House speech next week, in a bid to push more savers toward stocks and shares investments and channel funds into British companies.

But the Treasury has confirmed that the plan has been paused, with officials admitting there are “differing views” on how to proceed and that ministers want more time to consult the financial sector.

Instead, Ms Reeves will use her speech to the City on July 15 to focus on encouraging long-term investment, with more “advice and support” for consumers considering putting money into the stock market, including shares in UK firms.

A Treasury spokesperson said: “Our ambition is to ensure that people’s hard-earned savings are delivering the best returns and driving more investment into the UK economy.”

The potential reform had sparked alarm among building societies, which rely on cash ISA deposits to fund mortgage lending.

Robin Fieth, chief executive of the Building Societies Association, warned in a letter to the Chancellor this week that changing cash ISA allowances was “unlikely to encourage people to invest.”

The BSA also cited HM Revenue & Customs figures showing that more than 18 million people have cash ISAs, with almost half held by people with incomes of less than £20,000 a year, and an average savings balance of just under £13,400.

Consumer groups and critics said that lowering the ISA cap would do little to change savers’ habits and could penalise those on low incomes who prefer the security of cash over riskier investments.

Government officials said last month that Ms Reeves had been exploring a limit on cash ISAs set below the £20,000-a-year ceiling – with the aim of diverting part of the £300bn held in such accounts toward stocks and shares ISAs.

But ministers now appear to be taking a more cautious approach. Reeves is expected to launch an information campaign to help the public understand potential long-term benefits of investing in equities, rather than making sudden changes to savings rules.

The move comes shortly after the Financial Conduct Authority unveiled a major overhaul of advice rules aimed at helping people sitting on large cash balances. Under the proposals, companies such as investment platforms would be allowed to offer free “targeted support” to steer customers toward share-based investments.

While the government’s broader goal remains encouraging higher-yield savings behaviour, no final decision has been made on ISA reform – leaving the door open to further lobbying ahead of Reeves’ Autumn Budget.