Chancellor Rachel Reeves is reportedly preparing to water down significant reforms to cash ISAs, following intense pressure from building societies. The initial plan, aimed at boosting investment in London-listed stocks, involved a drastic reduction of the annual cash ISA allowance.
The Revised Proposal
Instead of the rumoured cut from £20,000 to £10,000, the Treasury is now considering a more modest reduction to £12,000 per year, according to a report by the Financial Times. This shift in strategy comes after building societies voiced strong concerns about the potential negative impact on one of Britain's most popular savings products.
Alongside the revised allowance, Reeves is also expected to use the upcoming Budget to introduce changes for stocks and shares ISAs. One key proposal under discussion would encourage, on a voluntary basis, ISA providers to steer savers towards allocating 25 per cent of their investments into UK equities.
A Contentious Political Battle
These potential reforms have ignited a fierce debate, creating a political battleground between brokers, investment platforms, and building societies. Brokers argue that incentivising investment in stocks and shares is crucial for supporting Labour's growth mission. An analysis by IG suggested that building societies' warnings were "largely overstated" and that the UK economy could see a £7.2bn boost if a third of cash ISA holders moved some money into investment products.
Conversely, building societies have defended the cash ISA as a vital stepping stone for millions to build financial resilience. Andrew Gall, head of savings at the Building Societies Association, stated: "We support efforts to help more people to invest... but cutting the Cash ISA limit simply won't achieve this. It would undermine one of Britain’s most successful savings products."
Echoes of Past Debates
This is not the first time such reforms have been contemplated. The previous government, under Chancellor Jeremy Hunt, had plans for a "British ISA" with an extra tax-free allowance for investing in London-listed stocks. The Labour government, however, scrapped this proposal to avoid overcomplicating the ISA system.
A Treasury official indicated that while the standalone British ISA is off the table, there is still hope for a "UK element" to be included in the forthcoming reforms, likely through the voluntary allocation for UK equities. With around £360bn held in cash ISAs, the outcome of this debate will have significant implications for savers and the UK's financial markets.
