Chancellor Rachel Reeves is poised to announce significant ISA reforms, aiming to redirect substantial cash savings into British companies.
Rachel Reeves is expected to detail plans to reduce the annual tax-free cash ISA allowance during her upcoming Mansion House speech on July 15.
This move is considered a landmark change for UK savings, marking the biggest overhaul of the ISA regime since its inception in 1999 under then-Chancellor Gordon Brown.
The initiative comes as the London stock market faces challenges, including a decline in company flotations and investors withdrawing funds from UK equity markets.
Proposed ISA Changes
Currently, the overall tax-free ISA limit stands at £20,000 annually, allowing British savers to shield a considerable amount from tax.
While Chancellor Reeves has pledged not to decrease this total annual tax-free investment amount (which includes options like stocks and shares), she has not ruled out imposing a lower cap specifically for money placed into cash ISAs.
Government officials indicate that the precise new limit for cash ISAs is still under discussion. The underlying belief is that this strategic shift will create a fresh stream of investment into London-listed companies, thereby boosting the stock market by encouraging savers to move from cash-based savings to equity investments.
Industry views on reforms
The proposed reforms have ignited fierce lobbying within the City. Financial firms such as brokers, investment banks, and asset managers largely support limiting cash ISAs, as it aligns with their interest in promoting equity investments.
Conversely, companies like building societies strongly oppose the proposed changes. They argue that cash savings are crucial for funding loans and that restricting cash ISAs might not fundamentally alter people’s financial habits.
Consumer groups and building societies also warn that it could be challenging to ensure that any redirected cash genuinely flows into London-listed stocks.
Susan Allen, CEO of Yorkshire Building Society, highlighted that “Not everyone is in a position where they have excess cash to invest,” noting that many customers hold cash for significant life events like weddings or home purchases.
An industry expert suggested the Treasury is “obsessed with” the nearly half a trillion pounds in cash that could be “deployed into the economy.”
Driving UK investment
The Treasury’s objective is to find the right balance between cash and equities through these ISA reforms. These plans are expected to be unveiled as part of the broader “financial services growth and competitiveness strategy” alongside Reeves’ Mansion House address.
While the Treasury typically doesn’t consult on ISA allowances, it is anticipated that they will engage the industry on the “mechanics” of any changes.
Furthermore, the Financial Conduct Authority’s (FCA) new policy on providing “targeted support” to help savers invest is also expected to be a key part of her speech.
Ministers are also exploring the possibility of allowing Long Term Asset Funds within ISAs, which would enable investors to access private markets, such as infrastructure, within a tax-efficient wrapper.
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