Some City firms have been pushing for cash ISAs to be limited or even abolished so that tax-free savings are channelled towards the stock market instead.
Evidence suggests UK investors have already been shifting their investments to other markets.
A House of Lords Library report this year found that the percentage of “funds under management” – money that fund managers invest on a client’s behalf – going to UK companies declined from 29.6 per cent in 2008 to 11.5 per cent in 2023.
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Read MoreAt the moment, individuals can put up to £20,000 a year into either a cash ISA or a stocks and shares ISA, with no income or capital gains tax levied on the profits.
Reeves has confirmed that she is considering putting new curbs on cash ISAs and promised to “create more of a culture in the UK of retail investing” when asked whether she would change the tax rules at the next Budget.
Khalaf said UK equity funds had continued to see outflows in 2024, with £13.1bn withdrawn by investors, and £13.6bn withdrawn the previous year before.
Khalaf added: “Relentless and large outflows are no doubt partly a reflection of the push-pull force of weak performance relative to the US. But UK equity funds are also suffering the slow and painful unwinding of investors’ high historical exposure to their home market.”
“Even if it did persuade people to invest the rest of their ISA allowance, there’s no wall of savings ready to be invested, because HMRC figures show two-thirds of cash ISA savers pay in no more than £5,000.”
Camilla Esmund, senior manager at ii, said: “The so-called ‘home bias’ that once dominated appears to be easing, as investors seek exposure to faster-growing international markets.
Shaun Moore, personal tax expert at Quilter, added: “Recent debate about the Government potentially cutting back on cash ISAs to foster an investing culture among UK consumers are intriguing but may not be as economically beneficial as some believe.
“People tend to diversify within stocks and shares ISAs across various asset types such as bonds, money market funds, and global equities. It is also a significant behavioural leap to assume that cash ISA savers will be immediately comfortable investing.”
But the ISA never launched before the that Government left office, and Labour has not continued with the plan.
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Experts have said there are policy changes that Reeves could make to foster more of an investment culture in the UK.
Khalaf said the Government could try removing stamp duty – a tax – on share purchases.
This is a proposal that has been flagged by others. Dan Neidle of Tax Policy Associates wrote last year: “The UK’s 0.5 per cent tax on share transactions is the highest of any major economy. No other country with a major stock exchange has a comparable tax. Stamp duty holds back the FTSE and increases the cost of capital for businesses.”
But Khalaf conceded that due to the current financial circumstances the Government was in, including Reeves’s tight fiscal rules, this move might not be “particularly palatable”.
Moore said another option would be to encourage additional tax reliefs for people investing in the UK.
He said: “There is an opportunity to consider other incentives to get people investing in UK companies. The government could consider introducing additional tax reliefs, such as an inheritance tax exemption, to supplement the income tax, dividend tax, and capital gains tax exemptions that ISAs already receive, if a proportion is invested in the UK.
“However, the ISA brand has been successful for so many years due to its simplicity and it’s important that is maintained.”
Coles added: “If the Government is keen to boost investment in UK companies, there are simpler solutions. The Chancellor could increase to the stocks and shares ISA allowance – which would automatically boost UK investment.
“The Government could also look at greater access to IPOs and secondary capital raising – plus scrapping stamp duty on UK shares – to level the playing field with overseas shares that don’t charge this tax.”
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