Plans to cut Cash ISA allowance shelved – reports

The decision will be welcome news to anyone who isn’t comfortable taking on risks with their wealth.

Chancellor Rachel Reeves is unlikely to make any immediate changes to the annual Cash ISA allowance.

The chancellor had been expected to announce a significant cut to the £20,000 annual Cash ISA limit, possibly to just £4,000, in her Mansion House speech next week.

However, there are now widespread reports that she has decided to shelve the plan for the time being.

Earn a tax-free rate of 4.98% with a Plum Cash ISA (affiliate link)

Why was the Cash ISA limit in the firing line?

The Treasury is seeking ever-more ways to boost both its finances and the ailing economy.

One of these plans included slashing the amount of savings you can set aside in a tax-free wrapper each year.

In doing so, it reasoned it would either earn more tax revenue as savers were forced to hold their money in taxable accounts, or it would bolster the economy as more people were pushed into investing their money in the UK economy instead.

While the move was, perhaps unsurprisingly, welcomed by the investing industry, it also came in for a lot of criticism from many quarters.

Most notably, the Building Societies Association (BSA) warned the move would drive up the cost of borrowing and reduce access to credit across the economy.

Robin Fieth, chief executive of the Building Societies Association, added: “Cash ISAs are used for a wide range of purposes, from saving for a first home to managing finances in retirement.

“These are not idle funds; they serve real, practical needs for both savers and the building societies, banks and other providers that receive the funds, and use them to support mortgage and other lending. 

“Simply changing ISA limits is unlikely to encourage people to invest, but it will hurt people who are responsibly saving for short-term goals, where investing may not be appropriate.”

The BSA has now welcomed the decision to shelve plans for Cash ISA reform.

Earn a tax-free rate of 4.98% with a Plum Cash ISA (affiliate link)

loveMONEY comment: a terrible time to hobble Cash ISAs

While it’s important to note that the ISA limit may well be reduced at a later stage, it’s still a welcome reprieve for savers.

Cash ISAs have become a hugely popular risk-free home for savers’ money in recent years.

One reason is that, as savings rates have increased from the doldrums of the early 2020s, it’s become far easier for savers to be hit with tax bills.

Under the Personal Savings Allowance, Basic Rate taxpayers can earn £1,000 before incurring any tax, while for Higher Rate taxpayers the figure is just £500.

Assuming you’re earning a rate of around 4% on your savings, those paying the Higher Rate of Income Tax could start losing money to the taxman if they hold more than £12,000 or so in a normal savings account, while those on the Basic Rate will be affected if they hold more than £24,000.

So the tax-free benefits of Cash ISAs have become far more appealing, especially for those who are saving long-term to build up a sizeable pot.

On top of this tax-free advantage, Cash ISAs also pay incredibly generous rates of interest these days.

As a case in point, the top-paying Cash ISAs from Plum and Trading 212 both offer a rate of 4.98%, while the best taxable account from Atom comes with a 4.75% rate.

Given ISAs are both tax-free and pay more generous rates, they make an obvious home for savers’ funds.

Of course, that’s not to say they are always a better bet than investing – which you can of course do tax-free by using a Stocks and Shares ISA.

If you are setting money aside that you don’t plan to use for at least five years (in order to ride out volatility), history says you’re far more likely to earn a better return by putting your funds in the stock market.

It all comes down to whether you’re comfortable with the element of risk that comes with it.

Ready to invest but want to shield your returns from the taxman? Open a Stocks & Shares ISA with Hargreaves Lansdown now.