By Kieran Isgin Levi Winchester
Under-fire Chancellor Rachel Reeves may reportedly announce plans to reduce the annual tax-free cash ISA limit as early as next week. It comes amid suggestions the government is considering cutting it down to 拢5,000.
A cash ISA is a saving account where up to 拢20,000 each tax year can be stashed away, with any interest earned being tax-free. Besides cash ISAs, there are other types such as Stocks and Shares ISAs, Innovative Finance ISAs, and Lifetime ISAs, where the 拢20,000 allowance can be distributed across various ISA types.
Yet the Financial Times has reported there have been discussions within the government about decreasing the cash ISA threshold significantly. While the Treasury has remained silent on any official changes, there are reports that the Chancellor might announce these developments in her upcoming Mansion House speech on July 15, reports the Mirror.
It comes after Emma Reynolds, Economic Secretary to the Treasury, called for an increased investment in stocks over cash. Stocks and shares ISAs differ from their cash ISA counterparts by offering a return rate based on the performance of invested companies rather than a fixed interest rate.
Martin Lewis offers his view on reports of cash ISA limit change
In light of these rumours, Martin Lewis remarked on X: “Reports @RachelReevesMP will announce a cut to the cash ISA limit at her 15 July Mansion House speech. “If true, I think it’s a mistake. I doubt it’ll substantially nudge people to invest not save; said to be the aim… Currently you can put 拢20,000 in tax-free ISAs, whether cash (savings) ISAs, shares (investments) ISAs or the smaller types.
“It’s said the reduction’d only be for cash ISAs, so people can still invest the same tax free. NB At this point I should note, it is v likely to only impact future ISA limits (though whether the cut would start this tax year is a big question) so those with money already in cash ISAs shouldn’t panic.”
The Treasury confirmed in the March Budget that the Government is “looking at options for reforms” for the cash ISA. Speaking to the BBC back in May, Ms Reeves said: “I’m not going to reduce the limit of what people can put into an ISA, but I do want people to get better returns on their savings, whether that’s in a pension or in their day-to-day savings.
“And at the moment, a lot of money is put into cash or bonds when it could be invested in equities, in stock markets, and earn a better return for people. But I absolutely want to preserve that 拢20,000 tax-free investment that people can make every year.”
Risk of tax on interest on ISAs
Savers have been more at risk of paying tax on the interest they’ve built on their savings as rates have improved over the past few years. However, not everyone is required to pay tax on savings interest.
If you’re a basic-rate taxpayer, you can earn up to 拢1,000 in savings interest every tax year before you need to pay tax. The threshold for higher-rate taxpayers is 拢500, while additional rate taxpayers don’t receive an allowance at all.
You would begin to pay interest on the money earned from your savings once you exceed these thresholds.