Investment Industry Warns Against Limiting Cash ISAs

The investment industry has stepped up its warnings to the government over plans to limit cash ISAs, arguing they could undermine British investors’ willingness to support listed companies. A meeting attended by key industry players, including representatives from major banks and investment firms, as well as officials from the Treasury and HM Revenue and Customs, resulted in heated exchanges over the impact of Treasury reforms.

Plans to Limit Cash ISAs

Under plans confirmed in the November Budget, the ISA cash allowance will be cut from £20,000 to £12,000 from April 2027, excluding savers under 65. The Chancellor said the move was aimed at encouraging greater investment in the UK stock market, with the balance of £8,000 available to invest in stocks and ISA products.

Anti-Avoidance Rules

The Treasury and HMRC are currently developing detailed anti-avoidance rules, including banning transfers from stocks and shares and innovative financial ISAs to cash ISAs. They are also considering the use of tests to determine whether an investment is suitable for investment in a stocks and shares ISA or is ‘cash-like’, and charges on any interest paid on cash held in Innovative Finance ISA stocks or shares.

Industry Concerns

The investment industry has loudly warned that the rule changes will add complexity and disadvantage savers focused on paring down their portfolios before they turn 65. There are also growing concerns that a stricter approach to taxing cash held in stocks and shares ISAs would significantly damage the image of ISAs as a tax-free investment option.

Potential Consequences

Any evidence that the reforms are undermining stock market investment before the next general election would have significant consequences. A number of companies have already withdrawn from participating in a multimillion-pound campaign aimed at raising the profile of retail investment to the public, citing cost and coordination reasons.

Industry Reaction

An industry insider who took part in the meeting said that it was clear that significant reforms to ISAs are being made on the fly, without any understanding of how retail investors will behave or the magnitude of the potential unintended consequences. They argued that HMRC has been put in the awkward position of having to implement changes that are fundamentally flawed, and that the Chancellor should go back to the drawing board and create an evidence base for meaningful, long-term reforms aimed at supporting private investors.

Next Steps

The reforms are subject to a consultation period, with draft legislation being submitted to Parliament in time for April 2027. In the 2023/24 tax year, savers put a record £103 billion into ISAs, with almost exactly two thirds of that invested in cash ISAs.

Government Response

A government spokesman said that the changes to the ISA rules are aimed at preventing circumvention of the new lower cash ISA limit, and that they are working closely with industry to publish clear guidance before the changes come into effect.