Chancellor Rachel Reeves is looking at changing ISAs (Image: Getty)
Buillding society bosses have urged Chancellor Rachel Reeves not to downgrade cash ISAs, with a warning that the move would damage the economy by making mortgages and business loans harder to obtain.Industry leaders put their concerns in a letter to the Treasury following reports that Ms Reeves could use next week’s Mansion House speech to announce she is cutting the amount that can be invested in a cash ISA, which allows people to save without paying tax on interest.
The Chancellor has said the personal allowance of ￡20,000 per year that can be invested into ISAs will not be reduced, but she wants to encourage people to put more of their money into a stocks and shares ISA, which potentially provides a higher return but also carries the risk of the value falling. It is currently possible to put the whole sum into a cash ISA. A letter signed by more than 30 building society chief executives warned: “Cash ISAs are a cornerstone of personal savings for millions across the UK, helping people from all walks of life to build financial resilience and achieve their savings goals.”
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The letter, also signed by the heads of credit unions and trade bodies such as the Building Societies Association, continued: “The funds deposited in these accounts support lending, helping to keep mortgages and loans affordable and accessible.
“Any significant reductions to the Cash ISA limits would make this funding more scarce which could have the knock-on effect of making loans to households and businesses more expensive and harder to come by. This would undermine efforts to stimulate economic growth, including the Government’s commitment to delivering 1.5 million new homes.”
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The industry leaders argued that savers who avoided stocks and shares ISAs often did so because they did not want to risk their money, but restricting cash ISAs would not make them more willing to take on risk.
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Robin Fieth, Chief Executive of the Building Societies Association said: “Cash ISAs are used for a wide range of purposes - from saving for a first home to managing finances in retirement. These are not idle funds; they serve real, practical needs for both savers and the building societies, banks and other providers that receive the funds, and use them to support mortgage and other lending.
“Simply changing ISA limits is unlikely to encourage people to invest, but it will hurt people who are responsibly saving for short-term goals, where investing may not be appropriate.”
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Interest on savings or profits from investments can be liable for tax, and an ISA is a legal method created by the Government to avoid this. Money saved in a cash ISA is not at risk and can currently earn interest rates of more than 4%. Investments in a stocks and shares ISA may earn a higher return but can potentially fall in value, particularly when there is a global shock to the economy such as Covid lockdowns or the introduction of tariffs by US President Donald Trump.
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Ms Reeves suggested changes would be made earlier this year in a BBC interview. She said: “I’m not going to reduce the limit of what people can put into an Isa, but I do want people to get better returns on their savings, whether that’s in a pension or in their day-to-day savings.
“And at the moment, a lot of money is put into cash or bonds when it could be invested in equities, in stock markets, and earn a better return for people. But I absolutely want to preserve that ￡20,000 tax-free investment that people can make every year.”
A Treasury spokesperson said: “We recognise the important role that cash savings play in helping households build a financial buffer for a rainy day. Our ambition remains to ensure people’s hard-earned savings are delivering the best returns and driving more investment into the UK economy.”