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UK chancellor Rachel Reeves is expected to announce plans to cut the annual tax-free cash Isa allowance in her Mansion House speech next month, in an effort to shift some of the £300bn cash pile into British companies.
Government officials said Reeves was planning to set an annual limit for cash Isas at a lower level than the current £20,000-a-year overall ceiling on the amount British savers can shield from tax in individual savings accounts.
The chancellor has previously promised not to reduce the overall amount that the public can invest tax-free each year, for example in stocks and shares, but she has not ruled out setting a lower cap for money put into cash Isas.
Reeves believes that the plan will create a stream of fresh investment into London-listed companies, boosting the stock market, by encouraging savers to shift from cash to shares, according to the officials. They said an announcement was most likely at Reeves’ Mansion House speech on July 15.
The move would mark the biggest overhaul of the Isa regime since it came into force in 1999 under the then chancellor Gordon Brown. It comes as London’s stock market suffers from a drought of company flotations and as investors pull their money from UK equity funds.
The issue has been the subject of fierce lobbying between City firms in favour of limiting cash Isas like brokers, investment banks and asset managers, and companies like building societies, who use cash savings to fund loans.
Earlier this year the government discussed reducing the threshold for the cash element of the Isa to as low as £5,000, according to City figures.
But one Whitehall figure familiar with the negotiations said that ministers had been listening to counter-lobbying to keep the threshold higher. Discussions are still taking place about the precise level that the government would choose, they added.
Cash is by far the most popular of the four main Isa products, which include a stocks and shares product and two more niche versions relating to alternative investments and saving to buy a home.
Reeves said: “I do want people to get better returns on their savings, whether that’s in a pension or in their day-to-day savings”. She added that she would not “reduce the £20,000 Isa limit”, but did not rule out cutting the allowance for cash Isas specifically.
A Treasury official confirmed that the government was “looking at options for reforms to Isas that get the balance right between cash and equities”.
Although investments tend to outperform cash over the long-term, consumer groups and building societies have argued that limiting cash would not necessarily change people’s financial habits and warned that it would be hard to ensure that cash flows into London-listed stocks.
“Not everyone is in a position where they have excess cash to invest,” said Susan Allen, chief executive of Yorkshire Building Society. “In many cases, our customers are holding cash to pay for life events like a wedding or moving home.”
One industry expert said: “What [the Treasury] are completely focused on — I’d say obsessed with — is the cash side, because there’s nearly half a trillion in cash that could be deployed into the economy.”
The plans are expected to be set out in the “financial services growth and competitiveness strategy” that will be published by Reeves alongside her Mansion House address.
Another financial services expert said that although the Treasury did not typically consult on Isa allowances, it would likely consult the industry on the “mechanics” of any changes to Isas.
The Financial Conduct Authority’s new policy on providing “targeted support” to help savers invest is also expected to form a part of her speech.
Ministers have also been considering allowing Long Term Asset Funds within Isas, so investors could access private markets, such as infrastructure, within a tax-efficient wrapper, according to one financial services head. Government officials declined to comment on that possibility.