Cutting the annual cash Isa allowance will not encourage many savers to switch to shares but could push up mortgage costs, MPs have warned the chancellor.
Adults can put up to £20,000 a year in a tax-free Isa and spread the money between cash and stock market investments as they choose. In the 2023-24 tax year, 66% of all contributions went into cash savings.
Earlier this year, Rachel Reeves paused plans to limit the cash Isa allowance but in the run-up to next month’s budget there has been renewed speculation that it could be reduced to £10,000 in an attempt to promote growth.
The Commons Treasury committee said on Saturday that the chancellor should not cut the cash Isa allowance, arguing this was unlikely to encourage people to put their money into the stock market. What was needed instead, the MPs said, was better financial education so people were able to make informed decisions about their savings.
In a report based on hearings with experts, the committee quoted Martin Lewis, the founder of the MoneySavingExpert website, who said “this concept that, if you stop people saving in cash, they are going to put money in stocks and shares is false. For people to invest in stocks and shares, you need a cultural change”.
The committee heard from building society bosses who warned reducing the cash Isa allowance would have negative effects on homebuyers.
They said building societies relied on savings deposits to fund mortgages and the market would become less competitive without the inflows, potentially pushing up rates.
Meg Hillier, the chair of the committee, said the MPs backed the chancellor’s ambition to help savers earn better returns through informed financial decisions, “but we are a long way from that point”.
She said: “This is not the right time to cut the cash Isa limit. Instead, the Treasury should focus on ensuring that people are equipped with the necessary information and confidence to make informed investment decisions.”
She added that without better financial education she feared “the chancellor’s attempts to transform the UK’s investment culture simply will not deliver the change she seeks, instead hitting savers and mortgage borrowers”.
Although the chancellor is not set to deliver her budget until 26 November, speculation as to its contents is already feverish. A possible cut to cash Isa limits is just one measure reportedly under consideration, alongside changes to the tax treatment of limited liability partnerships, changes to stamp duty and inheritance tax and a manifesto-breaking rise in income tax.
The financial backdrop to the November statement suggests Reeves will face tough decisions to balance the books. A recent decision by the Office for Budget Responsibility to downgrade its estimates for economic productivity is expected to cost the chancellor an estimated £20bn a year.
