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Chancellor Rachel Reeves will next week put the brakes on plans to reform cash ISAs, the popular British tax-free savings product, after a fierce backlash from building societies and consumer champions.
Reeves has not abandoned plans to reform cash ISAs, but government officials admitted there were “differing views” about how to proceed and ministers wanted more time to consult industry.
She will instead use her Mansion House speech next Tuesday to promise more advice and support to encourage the public to invest in stocks and shares, including in British companies, government officials said.
The chancellor had been widely expected to announce a cut to the annual tax-free cash Isa allowance in her July 15 speech, in an effort to shift some of the £300bn held in this product into UK companies.
Government officials said last month that Reeves was looking to set an annual limit for cash ISAs at a lower level than the £20,000-a-year overall ceiling on the amount British savers can shield from tax in individual savings accounts.
But the idea, intended to shift savings from cash ISAs to stocks and shares ISAs, is controversial.
Building societies argue that they use these products to fund home loans and that deterring savers could push up the cost of mortgages.
Robin Fieth, chief executive of the Building Societies Association, a trade body, said in a letter to Reeves this week that changing cash Isa allowances was “unlikely to encourage people to invest”.
The BSA said figures from HM Revenue & Customs showed more than 18mn people have cash ISAs. Almost half of cash ISAs are held by people with incomes of less than £20,000 a year, and the average savings balance is just under £13,400, it added.
A Treasury official said that while Isa reform was still a live option, Reeves wanted to consult more widely with industry about the best way to shift more money into higher-yield investments.
“Our ambition is to ensure that people’s hard-earned savings are delivering the best returns and driving more investment into the UK economy,” a Treasury spokesperson said.
Reeves’ decision not to press ahead with reform of cash ISAs in her Mansion House speech to City of London grandees will surprise many in the financial services sector.
It will also herald months of lobbying ahead of Reeves’ Autumn Budget, with brokers, investment banks and asset managers favouring a limit on cash ISAs.
But consumer champions have argued that reducing the tax-free allowance for cash ISAs is unlikely to change people’s behaviour, while other critics warned it would be hard to ensure that money flows into London-listed stocks.
In the meantime Reeves hopes that a campaign of advice aimed at persuading the public to put money into stocks and shares will have some effect in shifting the balance from cash savings to investment.
The government’s attempt to encourage savers to invest with the aim of achieving better long-term returns comes just after the Financial Conduct Authority proposed new financial advice rules to help savers get free “targeted support”.
The City regulator, in one of the biggest planned shake-ups to financial advice in more than a decade, wants to allow companies such as investment websites to make suggestions for people sitting on too much cash that they can put some money into shares.
