Chancellor John Healey’s announcement that he will scrap plans to cut the tax-free allowance on cash ISAs has been met with mixed reviews amid concern constant tinkering to the rules will impact saver confidence.
The move, announced in today’s Budget statement, will reverse plans unveiled in last year’s Budget by then-Chancellor Rachel Reeves to cut the allowance on cash ISAs from £20,000 to £12,000 for under-65s from April 2027 in a bid to get more people investing.
At the time, Reeves claimed the cut would encourage more investment into British companies but the proposal has long faced criticism for adding extra complexity to the ISA system and deterring people from saving, rather than encouraging them to invest.
It also came under fire from building societies, who warned that it could make mortgage lending more expensive as they rely heavily on cash ISA deposits to fund lending.
Jamie Jenkins, director of policy at Royal London, said: “It was questionable how effective the reduced limit would be in encouraging people to invest, and whether the adverse impact on mortgage funding would outweigh any benefit.
“There are other ways of encouraging people to invest, where it’s appropriate for them to do so, and carrots will certainly be more welcome than sticks.”
Healey’s decision to scrap the proposal marks a surprising volte-face, and while it has been widely welcomed, it has also raised concerns that constant changes could muddy the waters.
Winston Ruddick, senior financial planner at Broadstone, supports the decision to retain the £20,000 allowance.
“Protecting the cash ISA allowance is welcome news for savers, preserving their ability to build tax-free savings without taking on additional investment risk.
“While encouraging more people to invest is a sensible ambition that could boost long-term returns and channel more capital into UK equities, restricting access to tax-efficient cash savings was always a blunt instrument to achieve this.
“Cash ISAs are a simple, accessible and widely understood savings product, often providing a first step towards building longer-term savings habits and financial security. They play a vital role in financial planning, particularly for those with shorter-term savings goals or a lower appetite for risk.”
Tom Selby, director of public policy at AJ Bell, shared a similar sentiment.
“While the central aim of encouraging more people to invest for the long-term was the right one, the route Healey’s predecessor chose to achieve this was painfully convoluted, hardening the border between short-term saving and long-term investing and adding overwhelming complexity – not to mention a tax charge – into the system in the process.
“Healey deserves credit for seeing this iceberg coming and taking abortive action at the earliest opportunity.”
However, Michael Healy, CEO of IG Consumer, called the government’s decision “deeply misguided.”
He explained: “The Chancellor has squandered a golden opportunity to help British households build long-term wealth and get more money flowing into the businesses that drive our economy. At a time when Britain desperately needs growth, protecting tax incentives that encourage people to sit on cash rather than invest is a deeply misguided decision.”
For Healy, the Budget should have been about “making Britain’s money work harder for its people and its economy instead of defending a tax break that most savers don’t need.”
He added: “The Chancellor should have gone further by phasing out cash ISAs for new contributions and redirecting those incentives towards helping households invest, build financial security and share in Britain’s future growth.”
Kevin Brown, savings specialist at Scottish Friendly, also lambasted the announcement.
“It’s surprising, and hugely disappointing, that the Chancellor has abandoned the planned reduction in the cash ISA allowance. We supported that change as a step towards encouraging more people to consider investing and building better financial resilience across households in the UK.
“By reversing plans this afternoon, the government will have to answer the lingering question of how it will now deliver the investing culture it wants to create.”
Chris Rudden, head of UK investment consultants at Moneyfarm, said the bigger picture also needs to be considered.
“The bigger issue here is the repeated tinkering with savings and investment policy. People are being asked to make financial decisions that could affect them for decades, based on rules that keep changing.
“Encouraging more people to invest remains the right objective, but education alone isn’t enough – the right tax incentives tend to be far more effective at encouraging people to put long-term savings to work rather than leaving them in cash. What savers need now is consistency, not continual changes to the rules.”
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