Reeves may cut ISA allowance

UK Chancellor Rachel Reeves is expected to unveil plans at this month’s Mansion House speech to reduce the annual tax-free allowance for cash ISAs.

According to government sources, Reeves is considering introducing a new, lower annual limit specifically for cash ISAs, below the existing £20,000 yearly cap on total tax-free savings across all types of ISAs. Speculation ranges from slashing the allowance in half to reducing it to as low as £4,000.  

While the Chancellor has previously pledged not to cut the overall tax-free ISA allowance, including for investments like stocks and shares, she has left open the possibility of imposing a lower threshold on cash ISA contributions.

The move is aimed at encouraging some of the £300bn currently held in cash savings to be redirected into British businesses.

Reeves said: “I do want people to get better returns on their savings, whether that’s in a pension or in their day-to-day savings”. She added that she would not “reduce the £20,000 ISA limit” but did not rule out cutting the allowance for cash ISAs specifically.

What is an ISA?

An ISA, or ‘Individual Savings Account’, is a scheme that allows anybody to hold cash, shares and unit trusts free of tax on dividends, interest, and capital gains. Essentially, it’s a savings account that you don’t pay tax on.  

A cash ISA is a tax-free savings account that allows people to save cash without incurring income tax on interest. They have become more popular over the past two years due to rising interest rates, meaning that savers are paying far more tax on their savings – making cash ISAs very attractive. This has also led to increasing the competitiveness of the savings products.  

You can save up to £20,000 each tax year and receive tax-free interest payments, so when the value of your cash ISA increases, you get to keep all of it tax-free.  

While there is a £20,000 allowance in place for how much you can put in a year, there is not a cap on how much you can accumulate in an ISA over a lifetime.  

When choosing a style of investment to suit your needs, you may want to consider how long you plan to invest for and how much you would like your money to grow. It is also important to understand what movement in value you may or may not be happy with and any potential losses that may happen. That is why getting professional advice can be crucial for understanding how to take those first steps towards a secure financial future.

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This article is intended for general information only, it does not constitute individual advice and should not be used to inform financial decisions. 

The Financial Conduct Authority (FCA) does not regulate cash or tax advice.