Rachel Reeves set to cut the cash Isa savings limit - what would mean it mean for you?
The cash Isa is now severely under threat as it's revealed Rachel Reeves is incredibly close to cutting the allowance, which currently stands at £20,000 a year.
The Chancellor has previous ruled out lowering the overall Isa allowance but refused to rule out cutting the amount that can be kept in cash.
The Chancellor's Mansion House speech on 15 July is now forecast to be the date when Reeves announces a cut to the cash Isa allowance.
Insiders say the Treasury previously discussed cutting the allowance to as low as £5,000 but it is understood they are still considering the threshold.
It has also been suggested the amount that can be saved as cash could be trimmed back as far as £4,000.
With 82 per cent of This is Money readers saying it would matter to them if Rachel Reeves cut the cash Isa limit, we look at what it will mean for savers if the cash element of the tax-free wrapper is cut.
Under threat: Chancellor Rachel Reeves has refused to rule out a cut to the cash Isa allowance, which currently stands at £20,000
What is a cash Isa?
An Isa is a tax-free savings account which allows you to save up to £20,000 in it each tax year without having to pay any tax on the interest your savings earn or gain on investments. It stands for Individual Savings Account.
Currently, savers can salt away up to £20,000 in a cash Isa or stocks and shares Isa - or a blend of the two - and they receive a fresh £20,000 tax-free allowance at the start of the new tax year on 6 April each year.
This is a use it or lose it allowance, once the new tax year arrives any leftover allowance is gone.
The cash version is simply a tax-free savings account, usually with a bank or building society, that pays interest. The stocks and shares version allows Britons to invest in stocks, shares and funds without paying tax on the gains.
If you hold both a cash and stocks and shares Isa, the £20,000 limit is spread between both types of Isa and you do not get a £20,000 tax-free allowance per Isa.
Cash Isas currently offer returns of around 5 per cent on money held in them.
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Why do cash Isas matter?
When interest rates started climbing in 2021, so too did savings rates. While this was good news for savers, it meant many were faced with a potential tax bill on savings interest.
This is because of the Personal Savings Allowance (PSA) which dictates how much interest you can earn on your savings before being met with a savings tax bill.
You can earn £1,000 of interest on your savings before having to pay tax on this interest if you are a basic rate taxpayer.
This is slashed to £500 of interest tax-free if you are a higher rate taxpayer and if you are an additional rate tax payer you must pay 45 per cent tax on all the interest your savings earns.
This is because additional rate tax payers have no PSA.
As a result, cash Isas have become an attractive way for savers who want to keep cash savings without being taxed on their interest.
Some 12.4million adults hold cash them to shield their nest egg from the taxman.
A higher rate taxpayer would have to pay tax on their savings if they had more than £14,500 in cash earning interest at a rate of 3.53 per cent as they would breech their £500 PSA with this amount in savings, according to rates scrutineer Moneyfacts Compare.
Jeremy Cox, of Coventry Building Society, said: 'Since the recent uncertainly around the future cash Isa limit, and with higher interest rates eating into the tax-free PSA, more savers have been topping up their Isa contributions every month.'
Why could the cash isa limit be cut?
Calls have been growing from City bosses to cut the cash Isa allowance in a bid to get more people investing and boost the stock market.
Trading platform IG has called for the cash wrapper to be 'scrapped altogether', for example.
The Government wants to encourage more people to plough money into the stock market to bolster the UK's lacklustre retail investing culture.
Meanwhile, the Chancellor has been scrambling to find ways of boosting growth, in the hope that it can help her balance the government's books.
It is hoped the move to cut the cash Isa allowance will spark more investment into London-listed stocks, which will support the Government's growth agenda.
Research from the FCA shows around 7million people hold more than £10,000 in cash so there is an opportunity for the Government to recoup some of the cash it needs to rebalance its books by taxing money held outside of Isas.
What would it mean for savers?
Cash Isas play a vital role for cautious savers, particularly older individuals and higher-rate taxpayers, who prefer a low-risk and straightforward way to protect their money rather than taking on the risk that comes with investing in the stock market.
The typical cash Isa customer is a modest saver, from a low-to-middle income household, who relies on traditional savings as they build towards, or manage their retirement, according to Newcastle Building Society.
For this reason, Kevin Mountford of savings platform Raisin UK says: 'Reducing the allowance risks sending the wrong message: that those who choose stability and prudence are being penalised.'
Finance experts recommend households keep between three to six months' worth of income in cash savings as an emergency fund.
This needs to cover mortgage or rent payments, utility bills and food shopping in the event of something unforeseen happening such not being able to work due to illness or losing a job.
For those earning more than the UK median wage of £37,480, six months of income could easily be £13,500, far more than the mooted £4,000 the cash Isa allowance could potentially be slashed to.
It means households would have to keep emergency funds in an easy-access savings account where they could be liable to pay tax on the interest it earns depending on the rate.
Isas have also become a cornerstone of many people's personal finances - to move the goalposts could be considered a risky move.
What can savers do to protect themselves?
The best thing to do if you think you will want to use a large chunk of your cash Isa allowance but haven't yet done so is to use it sooner rather than later.
Any changes to the cash Isa allowance to come out of the Chancellor's Mansion House speech would most likely come into force at the start of the new tax year on 6 April 2026.
Sarah Coles, of stockbroker Hargreaves Lansdown says: 'With any change to Isas, we would tend to see changes come in for the next tax year.
'There have been exceptions to the rule, but changing an allowance mid-year would be unusual because of all the extra complexity it would introduce.'
How has behaviour changed since rumours started?
It's no surprise that in April this year, £14billion flooded into cash Isas, the highest on record since the Bank of England started recording this information.
While figures released this week by the Bank of England show in June £4billion flowed into cash Isas.
It is likely that many are seeing it as a last opportunity to cash stuff their Isas - if the limit was cut to £5,000 for example, it would take four years to fill up the £20,000 that currently can be used for cash.
Question about Isas? Get in touch: editor@thisismoney.co.uk
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