A group of senior MPs has warned the government not to cut the cash Isa allowance at the Budget as chancellor Rachel Reeves is understood to be considering the measure.
In a candid intervention, the cross-party Treasury Committee has unequivocally told the government that it should not introduce a cut to the £20,000 tax-free allowance granted to every saver.
The chancellor is reportedly considering dropping the figure significantly to £10,000 in a bid to boost investment in stocks and shares of British companies.
But this “simply will not deliver the change she seeks”, warns Treasury Committee chair Dame Meg Hillier, sharing a new report from the group of MPs that finds savers are unlikely to be incentivised to switch to investing.
The government’s focus should instead be on financial literacy, the report adds, and enabling people to make informed decisions with their savings.
An Isa is a tax-efficient pot which can hold cash or investments. Since 2017, holders have been able to add up to £20,000 a year to their account or accounts (combined if several) and they won’t be taxed on interest, capital gains or dividend income generated.
Cutting back the cash Isa allowance would also have a negative impact on mortgage savers, the committee warns, as it would constrain building societies’ access to retail savings – a “critical” funding source for their mortgage lending.
The measure would undermine the “stability and competitiveness” of these lenders, having an impact on both consumers and the broader financial ecosystem.
Chair of the Treasury Select Committee, Dame Meg Hillier, said: “The committee is firmly behind the chancellor’s ambition to create a culture in the UK where savers are sensibly investing their money and getting better returns through well-informed financial decisions. But we are a long way from that point.
“This is not the right time to cut the cash Isa limit. Instead, the Treasury should focus on ensuring that people are equipped with the necessary information and confidence to make informed investment decisions.
“Without this, I fear that the chancellor’s attempts to transform the UK’s investment culture simply will not deliver the change she seeks, instead hitting savers and mortgage borrowers.”
Tom Selby, director of public policy at AJ Bell, comments: “While the chancellor’s policy goal of boosting retail investing in the UK is the right one, slashing the cash Isa allowance would be a clumsy and ineffective way to go about it.
“All this would do is hardwire the barriers that currently exist between cash Isas and stocks and shares Isas, when behavioural research tells us tearing these barriers down and simplifying the landscape would be the most effective way of helping more people invest for their financial future.”
Responding to the report, Ms Reeves said: “My understanding is that the report says that changes to Isas shouldn't be made in isolation of other policies. I'll be setting out any tax changes in the budget in November. And of course we need to get that balance right.
“We want to help people to be able to save for mortgages, but we want people to get better returns on the money they're investing. To put money in an Isa or indeed in a pension means that you're sacrificing spending today to save for the future.
“At the moment, often returns on savings and returns on pensions are lower than in comparable countries around the world, and I do want to make sure that when people put something aside for the future, they get good returns on those savings.”
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