Warning Over Cutting Annual Allowance for Cash ISAs

An influential group of MPs have warned the government that cutting the annual allowance for cash ISAs could backfire in several ways. Speculation has been mounting for months that the Chancellor could lower the annual limit on tax-free savings – possibly from £20,000 to £10,000.

Government’s Objective

The government hopes to instead encourage savers to invest in stocks and shares ISAs, which can offer higher long-term returns and improve financial health. However, the finance committee says cutting emissions allowances would be unlikely to achieve this – and could lead to higher prices for consumers.

Impact on Building Societies

Building societies rely on ISA cash savings to fund mortgage loans – and a decline in deposits could lead to higher interest rates or fewer products on the market. Committee chairwoman Dame Meg Hillier said “we are a long way away” from achieving a culture where significant numbers of Britons invest in the stock market. “This is not the time to lower the cash ISA limit,” she warned.

Alternative Savings Accounts

Surveys suggest that if allowances are reduced, consumers may be able to move their cash to alternative savings accounts where they would have to pay tax on interest. Charlotte Harrison, managing director of a financial group, previously warned: "Building societies, which finance over a third of all first-time buyer mortgages, rely on retail deposits such as cash ISAs to fund their loans." “If ISA inflows fall, the cost of funding is likely to rise, and that means mortgages could become both more expensive and more difficult to access.”

Current Figures

The latest figures suggest that two-thirds of contributions to ISAs went into cash accounts in the 2023/24 tax year – totaling £360 billion. An estimated 14.4 million consumers save exclusively in a cash ISA, with the average balance at £6,993.

Chancellor’s Statement

Chancellor Rachel Reeves said: “Currently, returns on savings and pensions are often lower than in comparable countries around the world.” “I want to make sure that people who are saving for the future are getting a good return on those savings.” The committee’s warning comes amid speculation about whether Ms Reeves will increase income tax in next month’s budget – a key Labor manifesto promise broken.

Possible Tax Increases

Newspaper reports suggest the basic rate of income tax could be increased by 1p to 21% for the first time since the 1970s. This could raise around £8 billion and help close a black hole in the country’s finances, but risks putting consumers under further pressure as the cost of living crisis continues. A 1p increase in higher income tax to 41% is also thought to be under consideration, but this would only add £2bn to the exchequer.