Rachel Reeves is reportedly considering slashing the cash ISA to £12,000 – a slightly less dramatic cut than has previously been suggested.
The Treasury has been floating privately the idea of a cut to £12,000, down from the existing £20,000 limit but higher than the £10,000 suggested befiore, people familiar with the plans told the Financial Times.
Sources have confirmed to The i Paper that this is true, although it is still not set in stone and the Chancellor could opt for a larger cut in the autumn Budget.
Her hope is that reducing the allowance could push more people towards investing in the stock market through a stocks and shares ISA instead.
ISAs allow savers and investors to shield their interest or gains from tax – and they can put £20,000 into them a year currently, using either a cash ISA or stocks and shares ISA.
However, experts have warned that a cash ISA cut is unlikely to drive a significant number of people towards investing, instead pushing them to put more cash into a taxable savings account.
Laura Suter, director of personal finance at AJ Bell, said: “In the long run, there is considerable doubt that a cut to the cash ISA allowance would deliver a shot in the arm for the UK stock market.
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“A recent survey commissioned by AJ Bell found that just one in five savers would invest more in the UK stock market if the cash ISA allowance was cut. Over half would simply put their money into a taxable savings account.”
However, calculations suggest that the vast majority of people would not be affected by the proposed cuts to the cash ISA allowance.
The average amount put into a cash ISA during the 2023/2024 tax year was £6,993, government figures show, which is still considerably below an allowance of either £12,000 or £10,000.
For those who do max out their cash ISA allowance, most people have a savings allowance which allows them to earn interest on cash savings up to a certain amount without paying tax.
For basic-rate taxpayers – people who earn between £12,571 and £50,270 – this is £1,000.
For higher-rate taxpayers – people earning between £50,271 and £125,140, it is £500.
Additional-rate taxpayers earning over £125,140 do not have a savings allowance.
However, higher earners or those with significant cash reserves would pay more tax if they put more into a cash savings account instead of keeping it in a tax-free ISA wrapper.
How much more tax would you pay?
The i Paper has calculated how much tax you would pay if you had £20,000 to save and maxed out a cash ISA, putting any remaining cash into a savings account paying 4.51 per cent interest – the best available on the market currently.
We calculated what you would pay if you maxed out the existing cash ISA allowance of £20,000; a reduced allowance of £12,000; a reduced allowance of £10,000; or if the cash ISA allowance was removed altogether.
These are the four scenarios:
Scenario 1: Cash ISA allowance stays the same as now (so you put all £20,000 into an ISA, pay zero tax); Scenario 2: Allowance is cut to £12,000, so you put the rest (£8,000) into a savings account paying 4.51 per cent; Scenario 3: Allowance is cut to £10,00, so you put the rest (£10,000) into a savings account paying 4.51 per cent; Scenario 4: Allowance is scrapped, so you put all your money into a savings account paying 4.51 per cent;We found that generally, only additional-rate taxpayers – so the highest earners – would be affected by a cash ISA allowance cut, if they chose to put their remaining cash into a savings account instead.
Higher-rate taxpayers would be affected only if the cash ISA allowance were removed altogether. Basic-rate taxpayers would not be affected under any scenario.
One way to avoid paying more tax would be to put money into a stocks and shares ISA instead – and experts say that over the long-term, investing has historically outperformed money held as cash.
Even if you do not not want to invest the money, some accounts pay interest on cash held in these accounts, and it would be earned tax-free.
Suter said: “Encouraging more people to invest for the long term is a laudable and sensible aim, not just to boost the economy, but to help people leverage the power of the stock market to meet their long-term financial goals.
“But government should look beyond cutting the cash ISA allowance, which is unlikely to do anything to change people’s attitude to investing.”
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