Rachel Reeves may soon unveil proposals to decrease the annual tax-free cash ISA allowance, as per reports. A cash ISA is a form of savings account where individuals can save up to £20,000 each tax year, and any interest earned on savings is tax-exempt.
Various types of ISAs exist, such as Stocks and Shares ISAs, Innovative Finance ISAs, and Lifetime ISAs. It is possible to distribute the £20,000 limit across different ISA types.
According to the Financial Times, the government has explored the option of reducing the cash ISA threshold to as low as £5,000. The Treasury has not yet formally declared any alterations to the ISA allowance, but reports suggest that the Chancellor might make an announcement during her Mansion House speech on July 15.
This development follows a call by Emma Reynolds, Economic Secretary to the Treasury, for more investment in the stock market rather than holding cash. In a stocks and shares ISA, returns are based on the performance of the invested companies rather than a fixed interest rate.
Addressing the reports, Martin Lewis expressed skepticism about the potential reduction in the cash ISA limit. He noted that the reduction would likely affect future ISA limits and might not impact existing cash ISA funds.
In the March Budget, the Treasury confirmed that the government is evaluating options for cash ISA reforms. In an earlier statement in May, Rachel Reeves indicated no plans to decrease the overall £20,000 ISA limit but highlighted a desire for better returns on savings through investments.
Savers have faced increased tax liability on savings interest due to rising interest rates in recent years. Basic-rate taxpayers can earn up to £1,000 in savings interest tax-free annually, with different thresholds for higher-rate and additional rate taxpayers.
Individuals exceed these thresholds will incur tax on their savings interest earnings.