Rachel Reeves revives plans to overhaul cash Isas

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Chancellor Rachel Reeves is looking to use her Budget to revive plans for a major overhaul of tax-free Isas to divert tens of billions of pounds of savings from cash into domestic stocks, as she tries to import a US-style investment culture to Britain.

But Reeves knows that lowering the tax-free limit for cash ISAs — possibly halving it from £20,000 to £10,000 per year — will provoke a fierce backlash from building societies and wants British business to help her make the case for the changes.

“She wants to see people investing more in British stocks because it’s good for growth and it generates better returns for savers,” one ally of Reeves said. “But we can’t win the argument on our own. Lots of businesses support the idea but never say it.”

Her plan stalled in the summer following heavy lobbying by building societies, who warned that they used cash Isas to fund mortgages and that reducing these inflows would potentially make home loans more expensive.

At present, British savers have a £20,000 annual ceiling on the amount that can be shielded from tax in Isas. The cash Isa is by far the most popular product with an estimated £300bn deposited, followed by the stocks-and-shares Isa.

While Reeves has committed to keeping the overall £20,000 ceiling, she was looking at cutting the cash Isa limit as one of several options, people familiar with the plans said.

City minister Lucy Rigby told the Investment Association dinner on Tuesday that savers could more than double their savings if they chose to invest in the stock market. “We are committed to building a shareholding democracy,” 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 instead, they could now have around £83,000.” 

Treasury officials have held meetings with financial services companies in recent weeks to discuss plans to limit the amount that can be put in cash Isas.

The meetings came after Reeves said in her Mansion House speech in July that she would be considering “further changes to Isas” and “engaging widely in the coming months”, in an attempt to achieve “better outcomes for both UK savers and for the UK economy”.

A person close to the process said the Treasury was considering a £10,000 annual cash Isa limit, higher than the £5,000 previously suggested by industry figures.

Reeves’ allies say she wants people to invest more in London’s equity market, which has struggled to attract sufficient investment in recent years, leading to a drought of company flotations.

Treasury officials are also weighing the revival of a previous Conservative plan to create a “Brit Isa”, which would have provided an extra £5,000 tax- free allowance for UK equities. The idea was killed off by the Labour government on the grounds it would overcomplicate the Isa market.

Reeves’ team confirmed that cutting the cash Isa limit was being considered ahead of the Budget on November 26 but stressed that “a number of options are on the table and no decisions have been made”.

The Treasury said: “Cash savings are important for people looking to put cash away for a rainy day and we will protect that.

“But the chancellor has been clear that she wants to get Britain investing again, so British companies can grow and British savers who choose to invest can get more in return.”

Proponents of Isa reform — including asset managers and advisers who would benefit from companies raising more money via the London stock exchange — have argued that people should not be given a tax break for holding cash when it could be used to support the economy.

But some of the UK’s largest investment sites, such as Hargreaves Lansdown, have argued that capping the cash allowance could deter people from saving and might make it more complicated for people to switch between different types of Isas.

Reeves’ plans would mark the biggest overhaul of the Isa regime since it came into force in 1999 under the then-chancellor Gordon Brown. 

The government and regulators have already taken several steps to encourage people to invest. The Financial Conduct Authority said earlier this year that companies would be able to provide customers with “targeted support”, including generic suggestions, rather than more expensive financial advice.

The government also announced a campaign, set to launch next year, to raise awareness of the potential benefits of investing for individuals and the broader economy.