The Chancellor could announce changes to the amount Britons can save tax-free in their ISA in next month’s Autumn Budget, reports have suggested.
Rachel Reeves is said to be considering cutting the cash ISA allowance to £10,000 from its current £20,000 level.
It is part of a government drive to encourage people to invest in the stock market and boost the UK economy, rather than rely on cash savings and comes as the Government scrambles to plug a £30 billion black hole in its finances.
The reports were widely welcomed by industry experts.
Rob Morgan, chief investment analyst at Charles Stanley, said: “Cash ISAs are a popular and important product, especially with tax thresholds staying frozen, and interest rates much higher than a few years ago. There’s around £300 billion sitting in these tax-free accounts, some of which could arguably be better directed towards other assets.
“Lots of people in the UK hold too much cash and not enough in investments, which is a missed opportunity to drive long-term wealth creation. This reticence has negative ramifications for the success of the UK stock market and the wider economy too.
“Directing more money into Stocks & Shares ISAs could also be an opportunity to revive interest in the UK stock market which is suffering from a lack of investor interest and a dearth of IPOs.”
Michael Healy, UK managing director at IG, said: “For years, cash ISAs have been sold as a safe and sensible home for savers’ money, and the public has listened, parking hundreds of billions of pounds in them.
“In reality, cash ISAs are a pernicious product that have not only failed to improve people’s wealth but have steadily eroded it. They are completely incompatible with long-term wealth creation.”
Healy said the Chancellor should go further than cutting the allowance and abolish it altogether.
“They provide very little benefit to most people: at current interest rates, a higher-rate taxpayer would need to hold over £12,500 in savings before seeing any advantage. We should not be incentivising or rewarding the hoarding of cash, particularly at a time when our stock market is teetering on the brink through lack of investment.
“Britain needs more people investing and more money directed towards growth, and abolishing the cash ISA is a sensible place to start.”
Tom Selby, AJ Bell director of public policy, agrees the Chancellor is “absolutely right” to challenge the status quo on ISAs.
However, he warned that cutting the cash ISA allowance is unlikely to make a significant difference to behaviours. Instead, the Chancellor should focus on overhauling complexity and look to simplify the ISA market.
“The current fragmented market is overly complex and behaviourally illiterate, driving millions of people who could benefit from long-term investing to stick with cash, leaving them vulnerable to the impact of inflation.”
“Simplifying ISAs by combining the cash and investment versions into a single product is the obvious long-term answer, making the system simpler to navigate and removing barriers between saving and investing,” said Selby.
“If the government wants to send a message that it is backing UK markets as part of a retail investing drive, scrapping stamp duty on UK stocks bought within ISAs would be a straightforward, low-cost option that would be welcomed by retail investors and listed companies alike,” he added.
Could savers get around a more restrictive cash ISA allowance?
If cash ISAs were limited in some way, those seeking cash-like returns in exchange for little risk could look at short-dated gilts or money market funds in stocks and shares ISAs.
Morgan said: “That would require some level of knowledge, or perhaps advice or guidance, to achieve the desired objectives, but it is a possible work around for people happy to take a modicum of risk.”
In addition, most taxpayers enjoy a certain level of tax-free interest on their savings outside of ISAs. The Personal Savings Allowance lets many people earn up to £1,000 in interest on cash and certain investments each year. Basic rate taxpayers can earn £1,000 of interest year before paying tax, while higher rate taxpayers have a lower allowance of £500.
There is also a ‘starting rate’ for savings, which is a special 0% rate of income tax for savings income of up to £5,000 for those with taxable income below £17,570. Many lower earners with healthy cash reserves are therefore not necessarily too affected by fresh cash ISA restrictions, explains Morgan.
Finally, there is also the possibility of keeping money in Premium Bonds offered by National Savings & Investments.
“Premium Bonds pay tax-free ‘prizes’ instead of interest, and the returns are literally the luck of the draw. But the more you have in them, up to the limit of £50,000 per person, the more you can expect to get a reasonably consistent cash-like return,” Morgan added.
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