The cash ISA limit could be halved to £10,000 in the upcoming Budget as the Chancellor looks to revive her plans to boost wider investment in the UK stock market.
Reports previously suggested the cash ISA limit could be reduced to as little as £4,000 or even being scrapped altogether but received backlash from building societies and savers alike.
Now, the Financial Times reports she is looking to cut the limit from its current level of £20,000 to £10,000 in a bid to get more people investing.
Individuals can save up to £20,000 in an ISA – either invested in stocks and shares or in cash – and the interest or gains they make are free of tax.
Reeves has committed to keeping the overall level of £20,000 tax free across both ISAs, but is reported to be considering reducing the cash ISA to a maximum of £10k, while keeping the stocks and shares ISA at £20k, in order to encourage investment in the stock market. The cash ISA is the most popular product with an estimated £300bn deposited at present.
It is believed the Treasury wants to encourage savers to invest in the stock market instead, in order to boost the economy.
The government is struggling to balance the books with Rachel Reeves considering tax rises and spending cuts in November’s Budget in order to fill a hole in the nation’s finances estimated at £20-£40bn.
It has been hoping that economic growth would reduce the need for tax rises, but has struggled with a flat lining economy.
Lucy Rigby, a city minister, told the Investment Association dinner on Tuesday that people could more than double their savings if they chose to invest in the stock market.
She said: “Someone who put away £1,000 in a cash Isa every April since 1999 would now hold about £34,000. If they had instead invested in a stocks-and-shares Isa, they could now have around £83,000.”
Growing the economy is a key plank of the Government’s agenda, and crucial if it is to keep to its spending hopes, as well as its promise to the electorate that it will put more money in people’s pockets.
Industry experts, however, have warned against the push to stocks and shares ISAs.
More than 50 building societies and financial companies wrote to the Chancellor earlier this year calling on her to keep the cash ISA limit at £20,000 in order to help households to “continue building financial security”.
The signatories for the letter call the cash ISA a “cornerstone of personal savings for millions across the UK”.
Rachael Griffin, tax and financial planning expert at Quilter, said: “Reducing the cash ISA limit could potentially impact public confidence in a savings product that has long been valued for its simplicity and effectiveness.
“The cash ISA has helped millions build a financial buffer against emergencies, and reducing the allowance would penalise people for taking a cautious, responsible approach to managing their money.”
However, others believe reform would be positive.
Tom Selby, director of public policy at AJ Bell, said: “The chancellor is absolutely right to challenge the status quo on ISAs. 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.
“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 should savers do
Savers will likely be concerned about whether they should make the most of their £20,000 limit whilst it is available.
But experts say people should avoid making major moves with their funds on the basis of speculation.
Ms Griffin said: “Speculation ahead of the budget should not prompt people to make hasty moves. Savers should continue to use their existing ISA allowances where they can, and making use of your full ISA allowance each year, if possible, is always a good idea. It provides valuable tax protection on your savings or investments and helps build long-term financial resilience.”
square ISAS ExplainedIs now the time to get a cash ISA? How it compares to stocks and shares ISA
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If cash ISAs were limited in some way, then those wanting cash-like returns in exchange for little risk could mitigate the move by using short-dated gilts or money market funds in a stocks and shares ISA, says Rob Morgan, Chief Investment Analyst at Charles Stanley.
He said: “That would require some level of knowledge, or perhaps advice or guidance, to achieve the desired objectives, but it is a possible work around for people happy to take a modicum of risk.”
For those who want to keep their savings in other fixed or easy access accounts, they will still enjoy a certain level of tax-free interest on their savings outside of ISAs.
The Personal Savings Allowance lets many people earn up to £1,000 in interest on cash and certain investments each year. Basic rate taxpayers can earn £1,000 of interest year before paying tax, while higher rate taxpayers have a lower allowance of £500. Additional rate (45 per cent) taxpayers don’t receive any PSA.
Mr Morgan said: “There is also the possibility of keeping money in Premium Bonds offered by NS&I. Premium Bonds pay tax-free ‘prizes’ instead of interest, and the returns are literally the luck of the draw. But the more you have in them, up to the limit of £50,000 per person, the more you can expect to get a reasonably consistent cash-like return.”
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