Plans to cut cash ISA limits are reportedly on ice, but for how long?
Rachel Reeves has delayed plans to cut the cash ISA limit at her Mansion House speech on 15 July following backlash from banks and consumers, reports suggest.
The chancellor was expected to announce that the proportion of your overall £20,000 ISA limit that you could save in cash would be cut, possibly down to as low as £5,000, to try to incentivise savers to put their money into the stock market.
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However, reports in the FT suggest that plans to reform the popular tax-free savings vehicle have been put on hold in order to spend more time consulting the industry after significant pushback from both consumers and lenders.
Instead of a cut, Reeves is expected to announce a campaign to promote better awareness of how investing in the stock market works, aimed at persuading consumers that investing their money in a stocks and shares ISA will help it grow over the long term.
Since the start of the year, City firms and organisations have been lobbying the chancellor to reduce the cash ISA limit in order to direct more funds into the UK's unloved stock market.
Reeves previously said that she was looking at potential reforms to the ISA regime, and that she wanted to “get the balance right between cash and equities to earn better returns for savers” in their ISAs.
However, a cut to the cash ISA limit has been met with fierce opposition from consumers who do not want to put their money into the stock market, as well as ISA providers and lenders.
Particularly fierce opposition was voiced by the Building Societies Association (BSA) who wrote an open letter to the chancellor that urged her to reconsider the decision.
The BSA warned that cash ISA deposits are “an important source of funding” for banks and building societies and that they were vital in keeping mortgages and loans “affordable and accessible”.
A cut to the cash ISA limit could therefore “lead to higher borrowing costs and reduced access to credit across the economy,” argued the BSA.
Meanwhile, Chris Irwin, director of savings at Yorkshire Building Society, told MoneyWeek that cash ISA deposits “underpin” the UK mortgage market and a reduction could therefore “make mortgages more expensive and less available.”
Will a cut to the cash ISA allowance be announced later?
While reports suggest that no cut to the cash ISA limit will be announced at Mansion House on 15 July, that does not necessarily mean that ISA reform has been scrapped.
Indeed, it seems that a cut to the cash ISA allowance is still on the table, though further consultation on the issue is desired by the treasury.
After Mansion House, the next major event for the chancellor is her Autumn Budget, the largest fiscal event of the year.
If a cut to the cash ISA limit is pushed through, then it is likely that it will be fully announced as part of the Autumn Budget, so we can expect to hear more about potential ISA reforms in the run-up to the event.
The Autumn Budget usually takes place in late October or early November. Reeves’ previous budget was presented to parliament on 30 October 2024.
With this in mind, Jason Hollands, managing director of Bestinvest by Evelyn Partners, warns savers that, despite the apparent retreat, “ISAs are not out of the woods yet.”
Hollands adds that as the government sees ISAs as a way to boost UK growth, “the chancellor may well be very receptive to the lobbying by some in the City who argue Stocks & Shares ISAs should be refocused on UK equities, either wholly or by requiring a minimum allocation.”
How can investment be boosted without a cash ISA cut?
While a cut to the cash ISA allowance seems to be off the cards for the near future, the chancellor will still be grappling with the question of how she can direct more money into the stock market.
Without a dramatic reduction in the amount of money consumers can store in their tax-free cash ISAs, Reeves will need to think of more creative ways to incentivise investment.
One way that this is expected to be attempted is through a public campaign that demonstrates the merits of investing in the stock market.
Kalpana Fitzpatrick, digital editor of MoneyWeek and author of “Invest Now”, wrote that a cut in the cash ISA limit without a significant campaign to encourage investing would not shift the deep, embedded mindset that deters people from investing.
Instead, Reeves must create a culture shift to get savers to start investing, Fitzpatrick argues – an acknowledgement of this at Mansion House could be a good start to grappling with the UK’s deeper problems around investing.
Craig Rickman, personal finance expert at Interactive Investor, supports this view, saying that “adjusting the cash ISA limit was never the silver bullet to transform Brits into a nation of investors.
“To achieve this laudable aim, a broader push is required, one that seeks to improve financial education and knowledge, so that people recognise the merits of investing in the stock market, rather than parking their long-term savings in cash accounts.”
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