The looming crackdown on cash ISAs is set to rake in an extra £100m for Rachel Reeves’s Treasury in a fresh blow to savers, The i Paper can reveal.
Risk-averse savers who keep their money in cash, rather than moving it into a stocks and shares ISA, will end up paying tax on any interest earned, netting the Treasury tens of millions of pounds more than initially estimated.
It comes as a senior Labour MP warned ministers that their overhaul of the tax rules is “creating complexity and confusion”. At the same time, industry insiders are frustrated at a lack of detail on how the reforms will work.
Reeves announced at the last Budget that the maximum amount you can save into a cash ISA each year will fall from £20,000 to £12,000 from April 2027.
It will still be possible to put the full £20,000 into a stocks and shares ISA, or to split savings between the two accounts, the Treasury has promised.
The move is intended to encourage savers who are putting away relatively large sums to invest their money in the stock market and other forms of financial instrument which are more risky than cash but tend to produce much better returns, giving them a larger retirement pot and boosting UK economic growth.
But the detailed rules which will determine what sort of investments will be allowed have not yet been published amid confusion over how to stop people diverting money above the £12,000 limit into “cash-like” investments which are intended to mimic the low but reliable returns offered by a savings account.
It has also emerged that the new regime will make a net of £100m for the Treasury over five years, because some savers are expected to keep their money in cash and take a tax hit on the interest, rather than moving it into a stocks and shares ISA. Estimates slipped out by the Treasury show a gain of £5m in the next financial year, rising each year to a maximum of £45m in 2030-31.
The full rules will be subject to public consultation, but finance industry insiders say the Government has been slow to come up with detailed proposals. A source said: “The whole process has been weird. They clearly don’t understand retail investing.”
Meg Hillier, the Labour MP who chairs the influential Treasury committee in the House of Commons, told The i Paper: “When the Government’s planned ISA reforms were announced, it wasn’t clear how these changes could be applied in the real world. It’s deeply concerning that almost six months later, there is still no clarity.
“I have been pressing the Treasury on what they mean by the ‘cash-like’ holdings which will be banned from stocks and shares ISAs, but no answers have been forthcoming.
“I support the Government’s ambition to get people investing their money for better returns over the long term. The best way to put people off investing, however, is by creating complexity and confusion in the system. Unfortunately, that is the situation we are in. If the Treasury is going to make these changes and ensure they are well understood by industry and consumers before next April, they need to start making progress. If they don’t, they risk putting people off investing their savings.”
Sir Mel Stride, the Conservatives’ shadow Chancellor, said: “Rachel Reeves is punishing hardworking people for doing the right thing: saving for a home, for their family, or for a secure retirement. The ISA system works well – helping millions of people save and invest for their future without fear of unfair taxation.
“Labour’s plan to slash the ISA allowance is nothing short of a savings tax. It would hit ordinary people, undermine confidence, and send a terrible message: that under Labour, saving responsibly will be penalised.”
A Government spokesman said: “Overall, the savings package at the Budget does not raise revenue – and the vast majority of savers will continue to pay no tax on their savings.
“These reforms are about getting more people investing for better long‑term returns. HMT and HMRC are working at pace with industry on the detailed rules, including anti‑circumvention, and will update on next steps in due course.”
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