Analysts are urging the Government to raise the tax-free savings threshold for stocks and shares ISAs to bolster investment in the UK.
Speculation is mounting that the Chancellor Rachel Reeves may cut the annual cash ISA allowance to £4,000 or even scrap it altogether in her upcoming Spring Budget.
The potential changes would impact a huge number of savers. 2024 was a record year for cash ISAs, with savers adding close to £50billion to their accounts.
Sarah Coles, the head of personal finance at Hargreaves Lansdown, has warned against such reforms and argues there are better solutions to boost UK investment without penalising cash savers.
The Chancellor's rumoured reasoning behind the potential changes is to persuade savers to invest instead, helping to power British businesses.
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The Chancellor is being urged to raise the tax-free allowance for stocks and shares ISAs
However, Coles believes this argument is fundamentally flawed. "Cash ISA money is already working hard for the economy funding the mortgage market," she explained.
She also pointed out there's no guarantee people would switch to investments if cash ISA allowances were cut.
"There's nothing to say they would make the switch, because the ISA isn't the reason why not enough people in the UK hold investments," Coles argued.
Many potential investors are holding back due to a lack of confidence rather than ISA limitations. HMRC figures reveal two-thirds of Cash ISA savers contribute no more than £5,000 annually.
Rachel Reeves is reportedly understood to be considering changes to ISA allowances GETTY Analysts cite that this suggests there isn't a vast pool of cash waiting to be redirected into investments.
Coles emphasised that even if the changes persuaded some people to use more of their ISA allowance for investments, the impact would be limited.
She believes the Government is misunderstanding why Britons don't invest more. "Many of them are holding back because of a lack of confidence," she stated.
The proposed ISA reforms may therefore fail to achieve their intended purpose of boosting investment in British businesses, according to Coles.
One proposal involves reviewing the Advice Guidance Boundary to help guide people toward good financial decisions.
"It will mean businesses can offer more targeted support, which will include guiding people to move long-term savings into investment," she explained.
Notably, she advocated for increasing the stocks and shares ISA allowance instead of cutting cash ISA limits.
This would reportedly encourage "more money flowing into UK investment, without impacting cash savers." Greater access to initial public offerings (IPOs) could also bring new money into the market.
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Britons use ISAs to save any earned interest from the tax man
GETTY"IPOs are particularly useful to engage existing investors and potential new investors in opportunities in the market," Coles noted.
"Everyone needs to balance their short and long-term financial needs across cash, investment and pensions.
"People should always build up an emergency pot of rainy-day savings to help with any emergency. The cash ISA is a great way to do this in a tax-efficient way."
She warns that cutting the allowance would likely expose more careful savers to taxation. "The most likely outcome of any possible cut would be more diligent savers being exposed to tax," Coles cautioned.
