Rachel Reeves is reportedly considering announcing a reduction in the tax-free cash ISA limit in the upcoming week. A cash ISA is a savings account that allows individuals to save up to £20,000 per tax year with tax-free interest on savings.
Apart from cash ISAs, there are other types of ISAs available, such as Stocks and Shares ISAs, Innovative Finance ISAs, and Lifetime ISAs. Investors have the flexibility to allocate their £20,000 allowance across various types of ISAs.
According to the Financial Times, discussions within the government have revolved around potentially lowering the cash ISA threshold to as low as £5,000. While no official announcement has been made by the Treasury regarding any changes to the ISA allowance, speculations suggest that the Chancellor might address this issue during her Mansion House speech on July 15.
The move to potentially reduce the cash ISA limit comes following a call by Emma Reynolds, the Economic Secretary to the Treasury, for increased investment in the stock market over cash savings. Unlike traditional cash ISAs that offer a fixed interest rate, the returns on stocks and shares ISAs are dependent on the performance of the invested companies.
Responding to the reports, financial expert Martin Lewis expressed concerns about the possible cut in the cash ISA limit but clarified that it might only affect future ISA limits, reassuring existing cash ISA holders not to panic. The Treasury had previously indicated in the March Budget that reforms for the cash ISA were under consideration.
Rachel Reeves had previously affirmed that there would be no reduction in the overall £20,000 ISA limit but emphasized the need for higher returns on savings, promoting investments in equities for better returns. Basic-rate taxpayers can earn up to £1,000 tax-free on savings interest annually, with different thresholds for higher-rate and additional rate taxpayers.
The potential revision in the cash ISA limit aims to address the changing savings landscape, where savers face the risk of taxation on interest earnings due to improved interest rates. The government’s focus remains on encouraging individuals to seek better returns on their savings while preserving the tax-free investment opportunities provided by ISAs.