Will Labour scrap the British ISA?

Rachel Reeves looks set to scrap the British ISA, according to reports, after it was originally proposed in the Conservative Spring Budget to try and attract more investment into UK companies.

The Financial Times has reported that sources close to Labour believe the British ISA complicated the investment market and that Reeves will now officially drop the plan. There were already rumours circulating before the General Election went ahead that the British ISA would be ditched.

The previous Conservative government proposed the idea in the March 2024 Spring Budget, giving savers the opportunity to take advantage of an extra £5,000 towards their ISA allowance for investments made into UK stocks - meaning savers could shield £25,000 from the taxman, instead of the usual £20,000.

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But the idea was met with scepticism - not only because ISAs are already complex, but because the impact on the UK capital markets would be limited. 

AJ Bell CEO, Michael Summersgill, says: “The UK ISA was a political gimmick that was doomed to fail in its objective of boosting investment in UK Plc. The new government deserves huge credit for consigning this ill-conceived idea to the policy dustbin and will hopefully now take a more sensible, long-term approach to ISA reform than their predecessors, focused on simplification for the benefit of consumers.”

In a comment to MoneyWeek, a spokesperson for the Treasury, said: "No decisions have been made. The government will provide further information on its plans for the British ISA in due course."

But, with reports of the British ISA being dumped spreading like wildfire, it is likely we could see a confirmation in the October Budget, a move that will be widely welcome. Industry experts argue Labour should instead focus on simplifying the ISA system rather than introducing gimmicks.

Should Labour simplify ISAs?

While the ISA is a great way to make the most of tax-free savings, for most people they are confusing and off-putting. Could Rachel Reeves take steps to simplify the ISA landscape in the budget next month? 

Shaun Moore, tax and financial planning expert at Quilter, says: “The reality is the UK has a cash-savings problem and too much money is sitting in low yielding cash ISAs, doing very little to help them or the economy. Finding ways to get that money invested for the long-term would be far more beneficial to the UK as a whole without the need for the creation of an extra allowance. The more people we get investing, both in the UK and more generally, the more the economy will naturally come to benefit.”

Three ways the ISA could be simplified

1. Merge cash and stocks and shares ISAs. HMRC data shows there are around three million people with £20,000 or more invested in Cash ISAs, but no money invested in stocks and shares ISAs. Without segregation between the two, there could potentially be more future investors. 
2. Have one ISA product. There are currently around six types, and people have to open different accounts to match their lifestyle needs.  
3. Increase the overall ISA allowance to £25,000. The ceiling could be increased to help reduce the risk of falling into the tax trap. The ISA allowance has been at £20,000 since 2017. Increasing the ISA allowance could in fact also drive more money into UK companies.