Millions of Savers Face Tax-Free Allowance Cut
Chancellor Rachel Reeves is preparing to deliver a significant blow to millions of hard-working savers by slashing the annual tax-free ISA allowance in her upcoming Budget. The current £20,000 cash ISA allowance will be dramatically reduced to £12,000, according to revelations made on Monday.
The Treasury is expected to justify the move by arguing that the billions currently held in savings accounts could generate better returns if invested in the stock market. However, critics have immediately warned that this approach could backfire, potentially causing mortgage rates to rise and leading lenders to withdraw deals from the market.
Fiscal Pressures Drive Savings Raid
This raid on savers comes as the Chancellor scrambles to fill a substantial fiscal black hole while funding a massive £15bn welfare handout. The welfare package includes controversial plans to scrap the two-child benefit cap, adding further pressure on the Treasury's finances.
Sources indicate that Ms Reeves had initially considered cutting the tax-free ISA allowance to just £10,000, but settled on the slightly higher figure of £12,000 following significant backlash against the proposal. In another notable reversal, the Chancellor has also abandoned plans for a 'Brit Isa' that would have required a minimum 20% allocation to UK equities, as first reported by the Financial Times.
Industry Backlash and Warnings
The savings industry has reacted with strong criticism to the proposed changes. Robin Fieth, Chief Executive of the Building Society Association, expressed his disappointment, telling the Mail: "A cut to £12,000 will not encourage more people to invest but will add unnecessary complexity, particularly around ISA transfers, and risks damaging the overall ISA brand."
Fieth delivered an even more concerning warning about the potential knock-on effects: "As cash savings, especially ISAs, are used to fund mortgages there is likely to be an impact on the number of mortgages which can be provided, and/or the rate charged." He did acknowledge some relief that the reduction wasn't as severe as originally proposed.
The political opposition has been equally vocal. Tory shadow chancellor Sir Mel Stride accused Labour of launching what he called a "tax raid on savers" to fund their welfare spending plans. He told the Mail: "Hardworking savers shouldn't be facing a tax raid to fund Labour's addiction to ever more welfare spending."
Complexity Concerns and Market Impact
Industry experts have raised serious concerns about the complexity the changes would introduce. Tom Selby, director of public policy at investment platform AJ Bell, warned that the proposals represent the "absolute polar opposite" of the simplification Labour had promised before the general election.
Selby noted: "Rather than pursue a measured policy focussed on long-term simplification of ISAs to make it easier for people to invest for the long-term, the chancellor instead looks set to slash the Cash ISA allowance which will add complexity to the market."
The scale of the potential impact becomes clear when considering that approximately 40% of the £726 billion held in ISAs is in cash rather than stocks and shares. These accounts, launched in 1999, have become enormously popular with British savers seeking tax-efficient ways to build their financial security.
Despite the significant reduction, government sources pointed out that the average ISA subscription stands at around £6,000, meaning the vast majority of people would continue to pay no tax on their savings under the new regime.
Chancellor Appeals for Party Unity
Meanwhile, Ms Reeves has appealed to Labour MPs to maintain unity ahead of Wednesday's Budget, even if they disagree with some measures. At a meeting of the Parliamentary Labour Party on Monday, she acknowledged that Budget leaks had been "incredibly destabilising" but insisted the final package would be fair.
In a telling analogy, the Chancellor told colleagues: "The budget is a package. It's not a pick and mix - you can't say you like the cola bottles but you don't like the fruit salads. It comes together as a whole." She emphasised that "politics is a team sport" and urged MPs to stick together to deliver change and secure a second term.
The Treasury declined to comment on the specific ISA changes when approached on Monday, leaving savers and financial institutions awaiting Wednesday's official announcement with growing apprehension about the future of tax-free savings in Britain.
