Chancellor Rachel Reeves is intended to announce plans to reduce the annual cash allowance later this month, according to reports.
According to the Financial Times, government sources have confirmed that the Chancellor intends to reduce the benefit money, noting the first major change in ISA limits after the tax year 2017-18.
Discussions are still believed to continue with regard to the exact reduction of Cash ISA, but this move is part of the strategy to encourage people to invest more than their savings. Reeves are expected to make the message in his speech on his mansion on July 15.
ISA allow people to save or invest up to £ 20,000 a year without taxes, although there are different restrictions on specific types of ISA.
It is believed that plans are aimed at encouraging people to invest more than their money on the stock exchange in view of winning a higher return in the long run.
What is cash?
Cash ISA (individual savings account) works as a normal savings account, but is a more admissible way to save.
It is considered a stable and reliable way of saving, since your money is not investing in the stock market (and therefore subjected to instability in the market) and you do not pay tax on the income on the interest you earn.
There are two main types of monetary ISA: variable and fixed rate. The ISA fixed rate ISA offers slightly higher percentages of variables, but usually come with the condition that you cannot withdraw your money before the end of a fixed term.
There are four other types of ISA: ISA shares and shares, innovative ISA, Lifetime ISA and Junior ISA finance for children.
HMRC statistics revealed that in the 2022-23 tax year, over 7.8 million people kept cash compared to 3.8 million with ISA shares and shares (also known as ISA investment).
Bank of England’s numbers show that savings have deposited a record of £ 14 billion in April this year, the highest amount ever registered after the product introduced in 1999.
What are the possible changes?
Each tax year you can save up to £ 20,000 in one ISA or divide the allowance into multiple ISA without paying any tax on their interest or profits.
Savers can choose how to divide the tax limit between each of the accounts described above.
The change that is confronted will mean that the savings will be limited to how much money they can insert in cash, with the reported reductions between 4000 and 5,000 pounds a year.
It is unclear whether any of the other types of ISA will be affected.
In May, Reeves insisted that there were no plans to reduce the limit of 20,000 British pounds for the amount that can be used in ISA every year, saying: “Very few people are able to save 20,000 British pounds a year … We still want people to be able to save and I will certainly not reduce this limit.”
However, it did not rule out the limitation of tax investment in cash at that time.
What impact would this have on savings?
It is not clear how exactly the reforms will affect the habits of the savings, but this can attract more investment in the more risk ISA or stop people from investing all together.
Sarah Coles, Hargreaves Lansdown Financial Services, believes that changes can leave less money to investors to transfer from savings to investment.
“Cash ISA is often the first port when people start, and will often gradually go into investment as they find their feet.
“Reducing the allowance means that the savings are less affordable for the transfer of shares and shares ISA when they are comfortable with investing – effectively reducing investment rather than raising them.”
Why is Rachel Reeves doing this?
Reeves said the changes would be a better return to British investors, while some of the city believe the changes would attract growth to British companies.
Reeves said last month: “I want people to get a better return on their savings, whether it is in retirement or in their daily savings.
“And at the moment a lot of money is invested in cash or bonds when this can be invested in shares, in the stock market and win a better return for people.
“But I absolutely want to keep this limit for investment without taxes of 20,000 British pounds that people can do every year.”
At the end of the 2022/23 tax year, the UK adults held a total of £ 725.9 billion in ISA, according to Gov.uk, which could be an increase in tax yields and help balance the government’s books.
We hope that by promoting more investment in shares and shares of ISAS British companies and the city of London will benefit.
The United Kingdom Peel Hunt has suggested that the ISAS cash limit be reduced from £ 20k to £ 5K to promote stock savings transfer.
The bank report states that “Savings will benefit from investing in shares, given the long -term attempt at superiority of shares for money.”
What do critics say?
Martin Lewis said the changes would be a “big mistake” if the Chancellor presents them later this month.
Writing to X, Lewis said that the cutting of ISA’s money was a form of “P*SS People Off Economics” and although he supported to encourage people to invest, this is not the “route for it.”
“My suspicion is that for many who use cash, it will simply cause many to pay more tax on their relatively scarce savings, will not have epiphania and think” Aoh, I will just fill in the rest of my ISA help with investment instead, “he writes.
“I would be disappointed if the chancellor decides to listen to the major investment companies in the city and close many construction companies and consumer groups that said this was not a good route.”
A recent study commissioned by the investment platform AJ Bell found that only one in five savings would invest more in the United Kingdom stock market if the ISA cash allowance is reduced.
The director of AJ Bell for personal finance, Laura Sutter, says: “In the long run, however, there is a significant doubt that a reduction in ISA’s money would make a shot in the UK’s hand.
“More than half (from the respondents) would simply invest their money into a taxable savings account. Good news for the chancellor hungry for money less for the London Stock Exchange.”
Andrew Proser, Investengine Investment Head, said: “Simply altering the ISA monetary component, it is unlikely to have the foreseen impact of investing more people.
“The two age groups that are most likely to contribute to cash, aged 25-34 and 65 years old. Younger savings are likely to use cash or lifelong money to finance large-life purchases as a home deposit, while older saver can use them to finance short-term costs.
“None of these groups will want to see the value of their funds to hesitate as it would be investing. It is more likely that they will simply continue to own the same amount of money, but more of them would be outside the ISA tax sheath.”