Rachel Reeves is set to dismiss concerns raised by finance chiefs and proceed with plans to cut the £20,000 tax-free allowance on cash ISAs in the hope it will incentivise savers to invest in the London Stock Exchange.
The Treasury is reportedly considering lowering the annual cash ISA allowance to £4,000 to encourage more people to invest in UK stocks and bolster the economy.
The Government last month confirmed it was looking at options for reform, in what would be the biggest overhaul to the savings system since its creation in 1999 under the then Labour chancellor, Gordon Brown.
Around £300bn in savings are currently sitting in cash ISA accounts held by more than 18 million people. The Government is hoping that incentivising savers to invest in UK stocks instead of being nestled away in bank accounts.
Banks and building societies have challenged the Chancellor’s stance on scrapping the £20,000 tax-free limit after holding meetings with Treasury officials.
Emma Reynolds, the City minister, met with senior executives from NatWest, Lloyds, HSBC, Barclays, Nationwide and TSB this week, The Guardian reported, as part of informal discussions ahead of a consultation on the reforms.
Stuart Haire, chief executive of the Skipton Building Society, separately met Treasury officials to push against the plans. He told The Telegraph that reducing the limit would not have the desired effect.
Chancellor of the Exchequer Rachel Reeves arrives in Downing Street to attend the weekly Cabinet meeting (Photo: Wiktor Szymanowicz/Future Publishing via Getty)“We agree with the Government that people in the UK should increase, if they have the wherewithal and the risk appetite, the amount of money they have got in equities,” he said.
“However, changing the cash ISA limit will not do that, so therefore it’s the wrong tool to achieve the policy outcome.”
Lobby group UK Finance, which reportedly hosted the meeting with Reynolds, has also cautioned against any changes “to avoid restricting consumers’ options”.
Banks also benefit financially from cash ISAs
The business models of banks and building societies rely on their customers depositing money into accounts like cash ISAs.
This is an income stream for banks to fund loans to other customers, therefore generating money for themselves.
David Postings, the chief executive of banking lobby group UK Finance said: “Getting more people investing is the right thing to do, but we should do it in a positive way rather than restricting options such as the ability to invest in cash Isas.
“They are an easy-to-understand product that help individuals start saving and set aside money for the future. The money banks and building societies hold in cash Isas is also lent out, supporting borrowers and the wider economy.”
While banks and their advocates may hold such genuine concern for their customers, they would miss out on this income stream if savers instead chose to invest in stocks.
Hinting at the initial reforms in February, Reeves explained that she wanted to create “a culture … of retail investing” to achieve “better returns” for UK savers.
Reeves’s deputy Reynolds had also called for the UK to adopt an investment culture “that realises cash is not a good investment”.
She told a committee meeting in the House of Lords earlier this year: “Why do we have hundreds of billions of pounds in cash Isas?”
Banks have warned against cash ISA changes (Photo: Mike Kemp/Getty)While the Treasury would financially benefit from reducing the tax-free allowance, the reforms are more focused on boosting the economy by encouraging savers to invest and hopefully grow their money in UK businesses.
The Government would also not be able to take any of the £300bn that remained invested into cash ISAs as this is already deposited ahead of any chance to the tax-free allowance granted for each financial year.
Stocks can prove a better investment but not as safe
The UK’s top stocks and shares Isa investors generated 13 times the size of the biggest cash Isas, according to HM Revenue and Customs (HMRC) figures.
The average value of the top 25 stocks and shares Isas is around £8.8 million, compared with £650,000 for the top 25 cash Isas, the figures, obtained by money app Plum in March, showed.
The figures covered the year 2021/22 and were rounded to the nearest £10,000.
The minimum funds required for entry into the “top 25 club” for stocks and shares investors is £5.1m, compared with £500,000 for cash savers according to the figures.
Stocks are a far riskier investment, however, with your money able to go up and down, while cash ISAs generally offer a standard interest rate.
Despite ongoing reports about the changes and hinting at reforms by Government officials, no official announcement about the changes has been made.
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Read MoreTreasury costings documents released with the spring statement in March assumed the current overall ISA limit of £20,000 would remain in place until 2029/30.
A Treasury spokesperson insisted “no decisions have been made” yet on whether to change the ISA tax-free savings amount.
“We want to support people to save and absolutely recognise the important role that cash savings play in building a buffer for a rainy day,” they said.
“We also want to ensure that savers are getting the best returns possible, while boosting the economy to create jobs right across the UK.”
The Conservatives also warned last month that reforms to cash ISAs risk causing “damage” to the residential mortgage market.
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