City executives spoke to Rachel Reeves about reducing annual allowance from current £20,000, reports say. Major savings providers have pledged to fight any attempts to cut tax breaks on cash Isas amid reports that the government is considering a plan to slash the maximum amount people can put into them from £20,000 a year to £4,000.
In recent weeks a row has broken out over whether ministers should scale back tax breaks on the popular savings accounts. The chancellor, Rachel Reeves, is being lobbied by some fund managers to put more focus on the riskier practice of investing in the stock market as a way of boosting economic growth.
Senior City executives have had meetings with Reeves, and at the most recent there were discussions about possibly limiting the cash Isa allowance to £4,000 a year, the Telegraph reported. The main two types of Isa are the cash Isa and the stocks and shares Isa, and currently the most you can save in these accounts is £20,000 per tax year. Consumers can spread their money between multiple Isas or just pay into one, so at the moment savers can stash up to £20,000 a year in one or more cash Isas.
This allowance is a lot more generous than it used to be: for almost a decade the cash Isa limit was £3,000 a year, although it has stood at £20,000 since 2017. More than 18 million people have a cash Isa, and there is almost £300bn sitting in them, but earlier this month the new economic secretary to the Treasury, Emma Reynolds, spoke about the need to drive an investment culture “that realises cash is not a good investment”, adding: “Why do we have hundreds of billions of pounds in cash Isas?”.
However, cash Isas are a key source of funding for banks and building societies, which use the deposits to fund loans to households and businesses. Last week, Nationwide, Britain’s biggest building society, warned that any attempt to cut tax breaks on cash Isas would reduce the availability of mortgages for first-time buyers.
Investing in the stock market has the potential for higher returns: the average stocks and shares Isa produced a 11.86% return over the past 12 months, compared with 3.8% for the average cash Isa, according to data issued on Thursday by the financial data provider Moneyfacts.
However, investing in funds and shares involves more risk and would not suit those with shorter-term financial goals. Sign up to Business Today. Get set for the working day – we'll point you to all the business news and analysis you need every morning. after newsletter promotion.
Robin Fieth, the chief executive of the trade body the Building Societies Association, said many people were making a conscious decision to save in cash rather than stocks and shares. He added: “We will continue to press the chancellor not to reduce the amount hard-working people can save in cash Isas, undermining the success of these accounts, which have been built over many decades and which are valued by many savers.”.
