Major Cash ISA update as Rachel Reeves plots huge overhaul

Rachel Reeves could make a huge change to Cash ISAs, and with the Autumn Budget just around the corner, the Chancellor is weighing up halving the annual tax-free savings allowance to encourage wider investment in the UK stock market.

This could see billions of pounds diverted from cash into domestic stocks. The model would work similarly to the style of investment culture in the USA. Currently, the tax free limit is set at £20,000, but it could be lowered to £10,000, reports the Financial Times. But this change would not be one made without criticism from building societies.

An ally of Ms Reeves said: "She wants to see people investing more in British stocks because it's good for growth and it generates better returns for savers."

"But we can't win the argument on our own. Lots of businesses support the idea but never say it."

In the UK, the cash ISA is one of the most popular accounts. Even though the Chancellor has so far kept the £20,000 limit, insiders who are familiar with her plans for the upcoming Budget have said that lowering the limit is still an option.

Earlier this year, the opposition from banks, building societies and consumer campaigners meant any such move had been put on hold.

The Building Societies Association said it welcomed the Treasury stepping back from making any "hasty decisions" on ISAs, reports BBC.

Previously, investment platform AJ Bell had a prominent voice during discussions. It called for reform to encourage new investors rather than merely cutting a cash ISA allowance, such as removing stamp duty and simplifying the overall ISA environment.

City minister Lucy Rigby told the Investment Association dinner on Tuesday that savers could more than double their savings if they chose to invest in the stock market. "We are committed to building a shareholding democracy," she said.

"Someone who put away £1,000 in a cash ISA every April since 1999 would now hold about £34,000.

"If they had instead invested in a stocks-and-shares ISA instead, they could now have around £83,000."

According to reports, Ms Reeves' team confirmed that cutting the cash ISA limit was being considered ahead of the Budget on November 26 but stressed that "a number of options are on the table and no decisions have been made".

The Treasury said: "Cash savings are important for people looking to put cash away for a rainy day and we will protect that.

"But the chancellor has been clear that she wants to get Britain investing again, so British companies can grow and British savers who choose to invest can get more in return."

Types of ISA:

Cash ISA: Similar to a normal savings account, except you don't pay any tax on any interest earned. £20,000 limit.

Stocks and shares ISA: Also called an investing ISA, for buying bonds, shares in companies or other commodities such as gold, through funds. Dividends and capital growth earned are not taxed. £20,000 limit.

Lifetime ISA: For use in either purchasing a first home, or for retirement. The government will top up your contributions by another 25%. £4,000 limit.