Chancellor Rachel Reeves is reportedly considering a new cap for cash ISAs that differs from earlier predictions, setting the annual tax-free allowance at £12,000 instead of the previously rumoured £10,000.
Industry Reaction and Public Sentiment
This potential change, expected to be announced in the Budget on November 26, is facing significant opposition. Data from the fintech company Plum reveals that 68 per cent of British cash ISA holders are against any reduction to the annual allowance.
Victor Trokoudes, founder and chief executive of Plum, has issued a stark warning. He suggests that the policy might backfire on its core objective of encouraging investment in UK equities.
Potential Consequences for Savers and the UK
According to Plum's research, if the allowance is cut, a large portion of savers would not simply move their money into stocks and shares ISAs. The data shows that 37 per cent of respondents would shift funds into standard savings accounts, while 20 per cent would use current accounts. Only 18 per cent said they would invest in British equities.
Mr Trokoudes emphasised the combined effect of this change with fiscal drag from frozen tax thresholds, which are expected to remain beyond April 2028. This could push more people into paying tax on their savings as they exceed their Personal Savings Allowance.
He stated this would be "especially harsh" given the current high inflation driven by food prices and utility bills. Crucially, he warned that capital could be diverted from UK banks and building societies to American companies, undermining support for lending to British consumers.
Calls for a Different Approach
Both Plum and The Investing and Saving Alliance (TISA) are urging the government to reconsider. They advocate for incentivising investment rather than penalising savers.
Carol Knight, chief executive of TISA, echoed the concerns of the Treasury Select Committee, stating that cutting the cash ISA allowance is unlikely to achieve the goal of boosting investment in UK stocks and shares. Instead, she warned it could lead to money being held in lower-interest products or not being saved at all.
Proposed alternatives include extending the stocks and shares ISA allowance, introducing a starter bonus for new investors, and simplifying the ISA system into a single product. TISA also recommends the Treasury focus on better financial education and clearer information on investment products to build public confidence.
