Rachel Reeves set to make major cash ISA decision - savers won't be happy

Rachel Reeves is reportedly planning to reduce the annual allowance for tax-free cash individual savings accounts (ISAs), cutting the amount British savers can shield from taxation, in her latest bid to boost economic growth. The Chancellor is expected to set out the details of the overhaul during her Mansion House speech next month. Brits with savings accounts currently benefit from a £20,000 annual limit on the amount they can put into cash ISAs or stocks and shares ISAs tax-free.

Reeves has pledged not to cut the overall annual tax-free allowance, but stopped short of ruling out a lower cap for cash ISAs in particular. Cash ISAs offer competitive savings rates and spiked in popularity at the beginning of this tax year, with £14 billion deposited into the accounts in April, the highest since records began in 1999.

Reeves believes that the change will boost investment in the UK stock market, insiders told the Financial Times, with savers forced to switch from cash to shares ISAs.

The issue has been subject to major debate within financial and political circles, however, with ministers reportedly swayed from cutting the cash ISA threshold to £5,000 earlier this year by lobbying from firms including building societies, who have a vested interest in not limiting cash savings in order to fund loans.

One industry expert suggested that the Government was fixated on directing some of the £300 billion currently kept in cash ISAs into London-listed companies.

"What [the Treasury] are completely focused on - I'd say obsessed with - is the cash side, because there's nearly a trillion in cash that could be deployed into the economy," they said.

Victor Trokoudes, founder and CEO of financial company Plum, said cutting the cash ISA limit could "limit saving goals" for Brits and make it more likely that they have to pay tax on their interest.

"A cash ISA is a type of savings account that also protects savers from income tax on interest earned, which is why some people refer to them as 'tax wrappers'," he told This is Money.

"Whilst cutting the limit may not matter to savers who can't afford to pay in the full allowance of £20,000, it will have important ramifications for many cash ISA users.

"They may feel it limits their savings goals, especially if they are a higher rate or additional tax rate payer, as they have no reduced or no savings allowance respectively. That makes it more likely they will have to pay tax on their interest."

"Investing isn't a suitable option for those who are building their emergency financial buffer, or don't want to take on any risk because they have a particular goal in mind for the very short-term," he added.

"For example, if you were saving for a special event like a wedding in the next year, you likely wouldn't want to put your capital at any risk in the stock market."

The Chancellor said she "wants people to get better returns on their savings, whether that's in a pension or in their day-to-day savings" and ruled out "reducing the [overall] £20,00 ISA limit".

However, a Treasury official added that Labour was "looking at options for reforms to ISAs that get the balance right between cash and equities", with the new approach potentially set to be outlined in Reeves's Mansion House speech on July 15.