Rachel Reeves pledges 'long overdue' ISA reform as cut to tax free allowance 'still on the cards'

The move aims to boost returns for savers and encourage a stronger culture of retail investment in the UK.

Rumours had circulated for months that the Chancellor might slash the cash ISA limit from £20,000 to as little as £4,000. However, Reeves has opted not to implement such changes immediately, giving savers a reprieve.

The Treasury's Spring Statement document specifically mentioned looking at reforms that would "earn better returns for savers" whilst supporting the government's growth mission.

Any potential changes could now be delayed until the autumn Budget, according to industry speculation.

Carol Knight, Chief Executive of The Investing and Saving Alliance (TISA), said: "Announcing a review later in the year leaves us nervous that an ill-advised cut to the tax benefits of this popular saving product is still on the cards."

British savers currently hold approximately £300billion in cash ISAs, highlighting their enduring popularity. Cash ISAs were first introduced in 1991 and have become a cornerstone of British savings culture.

The latest figures reveal the value of tax relief provided to cash ISA savers has risen dramatically from £70million in 2021/22 to £2.1bn in 2023/24.

Meanwhile, the value of tax relief for stocks and shares ISA investors has doubled since 2017/18, from £2.8bn to £5.6bn. This growing cost to the Treasury may be influencing the government's thinking on reforms.

The Chancellor appears keen to encourage more Britons to move away from excessive cash holdings generating low returns, towards growth assets that could better secure their financial futures.

Rachael Griffin, tax and financial planning expert at Quilter said: "It's encouraging to see the Treasury taking a serious look at ISA reform. ISAs are long overdue some careful thought to ensure they are both simple and produce the right behaviours."

Griffin noted there is "a real opportunity here to simplify the system" and better align it with Labour's objectives.

She suggested making stocks and shares ISAs more attractive than cash alternatives could help more people grow wealth over the long term.

This would also "direct more capital toward productive investment, which is clearly a goal for this government," Griffin added.

However, she cautioned that reforms must be "handled with care" as cash ISAs remain popular for good reason.

"They offer security, accessibility and certainty, particularly for older savers or those with shorter-term goals," she explained.

Griffin emphasised that finding the right balance would be crucial to encourage investment without alienating those who rely on safer options.

She also highlighted that ISAs have become "increasingly confused with multiple different products and restrictions."

Kevin Mountford, co-founder and personal finance expert at Raisin UK, expressed relief that ISA reforms were not implemented in the Spring Statement.

"Many will be pleased to see that ISA reforms did not make an appearance in the Spring Statement," he said.

Mountford highlighted that individuals can still contribute up to £20,000 into their ISAs tax-free, whether in cash, stocks and shares, or innovative finance products.

He noted that with many savers worried the allowance could be reduced, "ISAs remain a great way to save and invest your money."

Mountford also reminded savers of the approaching end of the tax year.

"It is vital to make the most of your allowance before it refreshes with the new tax year," he advised.

Carol Knight said: "We urge the Chancellor to leave the Cash ISA alone and engage with us and the industry to develop more effective ways of building the investment culture she and the country need.

We also welcome the Chancellor's announcement that they will be working with the FCA to deliver a system of Targeted Support, which will help millions more make effective financial decisions and feel confident in investing their cash"