Rachel Reeves’ planned Cash ISA cuts ‘will harm savers and the entire economy’ | Personal Finance | Finance
The Building Societies Association (BSA) has warned that any cut to the Cash ISA limit would be counterproductive to the Chancellor’s aim of creating a stronger investment culture. They argue the move would ultimately “harm savers, the housing market and the wider economy”.
In its Budget submission to the Treasury, the BSA said that reducing Cash ISA limits would not encourage more people to invest, but would instead penalise responsible savers, restrict flexibility and risk pushing up the cost of mortgages. It comes following new reports that Rachel Reeves could be looking to revive plans to overhaul Cash ISA rules in her upcoming autumn Budget, with the current £20,000 tax-free allowance potentially halved to £10,000.
Andrew Gall, head of savings at the BSA said: “We are very concerned that the Chancellor is still considering cuts to the Cash ISA limits.
“We support efforts to help more people to invest and grow their wealth, especially in the UK, but cutting the Cash ISA limit simply won’t achieve this. Instead it would undermine one of Britain’s most successful savings products and a stepping stone that has helped millions to build financial resilience and confidence to invest for their future.”
He added: “We call on the Chancellor to listen to the millions of people who rely on Cash ISAs to save safely and flexibly. Rather than restricting their options, we should build on what is already working and help people to make informed choices about their finances.”
Building societies rely on customer deposits – around 40% of which come from Cash ISAs – to fund half of their mortgage lending.
Since building societies are restricted in their ability to offer investment products like stocks and shares ISAs, a reduction in the tax-free limit could significantly undermine their deposit base and, by extension, their lending capacity.
Charlotte Harrison, home financing CEO at Skipton Group said: “If ISA inflows fall, the cost of funding is likely to rise, and that means mortgages could become both more expensive and harder to access.
“That risks derailing the Government’s own target of building 1.5 million homes, a goal that depends on buyers being able to secure affordable mortgage finance.”
Ms Harrison added: “At Skipton we back getting more people to invest, absolutely. But not by penalising savers who want low-risk, flexible options. Cash ISAs work. Undermining them doesn’t. What’s needed now is a Government supported, industry-led campaign to boost financial awareness, helping people make confident choices about when to save and when to invest.”
“We’ve raised our concerns directly with Ministers and will keep pushing for a balanced approach which protects savers and supports homeownership.”
City leaders and financial firms have been mounting pressure on the Chancellor to cut the Cash ISA allowance, arguing that a reduction could encourage more savers to invest in UK companies and stimulate the stock market.
During her Mansion House speech, Ms Reeves tabled any allowance changes, but indicated she wanted to “get the balance right” between saving and investing.
However, according to the Financial Times, a source said the Treasury was now considering a £10,000 annual Cash ISA limit, which is higher than the £5,000 previously suggested by industry figures.
Ms Reeves’ allies say she wants people to invest more in London’s equity market, which has struggled to attract sufficient investment in recent years.
Some industry experts agree that Cash ISAs should be reformed, but the allowance should be left alone. Tom Selby, AJ Bell director of public policy, said: “The chancellor is absolutely right to challenge the status quo on ISAs.”
However, he pointed out: “Any reforms pursued at the Budget should focus on making it as easy as possible for those with excess cash to invest for the long-term. The current fragmented market is overly complex and behaviourally illiterate, driving millions of people who could benefit from long-term investing to stick with cash, leaving them vulnerable to the impact of inflation.
“Simplifying ISAs by combining the cash and investment versions into a single product is the obvious long-term answer, making the system simpler to navigate and removing barriers between saving and investing.
“If the Government wants to send a message that it is backing UK markets as part of a retail investing drive, scrapping stamp duty on UK stocks bought within ISAs would be a straightforward, low-cost option that would be welcomed by retail investors and listed companies alike.”
What is an ISA?
First launched in 1999, Individual Savings Accounts (ISA) are a tax-efficient savings or investment account available to UK residents. There are four main ISA types: Cash ISAs, Stocks and Shares ISAs, Lifetime ISAs, and Innovative Finance ISAs.
Cash ISAs function like a standard savings account, but all interest earned is tax-free.
Stocks and Shares ISAs allow you to invest in shares, funds, or bonds, with all investment growth and income shielded from tax.
Innovative Finance ISAs are slightly more risky, but these accounts let you invest in peer-to-peer lending or crowdfunding platforms, with returns protected from tax.
Finally, Lifetime ISAs are designed to help people save for a first home or retirement, with an annual contribution limit and a Government bonus of up to a maximum of £1,000 per year.
There is a total ISA allowance that runs each tax year, starting from April 6 to April 5, and the maximum you can deposit across all your ISAs is currently £20,000.
You can split this allowance across different types of ISAs, and recent rule changes allow you to pay into multiple ISAs of the same type in the same tax year, provided you don’t exceed the overall limit.
To open an ISA, you must be at least 18 years old (or 16 for a cash ISA) and a UK resident for tax purposes. People aged under 18 can instead launch a Junior ISA, which allows tax-free savings of up to £9,000 per year.