There is growing speculation that Chancellor Rachel Reeves will announce plans to cut the annual allowance for cash ISAs in a bid to encourage people to invest more.
Reports suggest that the Chancellor will unveil the measure in her Mansion House Speech on July 15.
Individuals can currently put £20,000 a year into an ISA tax-free, choosing how to split the limit between cash and stocks and shares ISAs.
It has been suggested that slashing the cash ISA limit would encourage people to invest instead, which would help to boost the UK economy. Previous reports suggested that the Chancellor could lower the annual allowance to as little as £4,000.
However, there is concern that changes could have a negative impact on savers, who often use cash ISAs as a stepping stone to investing.
Sarah Coles, head of personal finance at Hargreaves Lansdown, said: “Cash ISAs are often a first port of call when people are starting out, and they’ll often gradually move over into investments as they find their feet. If the speculation is accurate, it means they’ll have less available to transfer into stocks and shares ISA, effectively reducing investments rather than boosting them.
“This is an issue which requires a carrot not stick approach. We know through extensive research that the barriers to investing are behavioural, so it’s through encouragement and increased confidence that we will all increase the number of retail investors.”
Coles said any changes to the ISA regime should not add friction into transferring money between products.
“Keeping allowances at the same level across cash and investments means that with targeted support, firms will be ideally placed to help people right size their allocation, based around their financial needs at different times, rather than second guessing where tax allowances might end up,” she added.
Brian Byrnes, head of personal finance at Moneybox, said the speculation is already causing “uncertainty and confusion” for consumers, which will weigh heavily on first-time savers and those with less financial confidence.
“Simply cutting the tax fee allowance on cash ISAs will not necessarily prompt equal inflows into investing products. People opt to use cash ISAs over their stocks and shares counterparts for a multitude of reasons, including risk aversion, and reducing the amount of money these savers can put into the cash ISA is unlikely to change this mindset.”
Byrnes said cash ISAs are perfect for anyone looking to build up emergency savings and achieve their short- to medium-term financial goals and once people have peace of mind and security, they are more likely to have the confidence to start investing for the future.
“Driving a meaningful cultural shift towards investing requires policies that make investing easier and more attractive to the UK public. If the Government wishes to boost the level of retail investment in the UK, they must do all they can do to provide savers with the tools to build financial confidence and save and invest more, particularly young people who have longer time horizons and will benefit most from investing,” he added.
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