Rachel Reeves is eyeing a drastic overhaul of ISAs as part of her quest to grow the UK economy that has so far proved elusive.
The Chancellor’s bombshell October budget raised taxes by £40billion while handing a massive cash injection to the NHS and other public services.
But Reeves’ bold measures- which include a massive Employers’ National Insurance hike worth £24billion- were partly reliant on the UK economy growing and the subsequent boosted tax receipts the Treasury would rake in.
Growth has not materialised, however. The OBR recently announced 0.1 per cent growth in the last quarter, but that’s a real terms cut to Britons’ standard of living as population increase negated any tangible benefits.
Chancellor Rachel Reeves delivered her first Budget in October which sparked an exodus of millionaires from BritainPAExperts have attributed this to Labour’s constant economic doom-mongering and several policies that rocked business confidence and were seen as anti-wealth and anti-aspiration.
These include the Employers’ Hike (dubbed the jobs tax) which makes it more expensive to employ people, and the slashing of inheritance tax relief for businesses and farms, a move that has left family businesses and farms scaling back investment and cancelling orders in preparation for a huge tax bill.
As a result, Reeves is now scrambling to kickstart growth and save her budget from being crushed by market forces.
One option the Chancellor is exploring is a shakeup of ISAs- a cash saving mechanism brought in by Gordon Brown to make Britain a ‘nation of savers’.
Reeves has previously made clear that the party's manifesto pledge not to hike National Insurance Contributions (NICs) only related to those paid by employees
GETTYCurrently, people choose to invest in ISAs as they offer a safe investment and steady (if small) returns via interest rates which, crucially, are tax free.
The relief is only available for interest earnings on up to £20,000 in the ISA. This means if you invested £20,000 in an ISA with a 4.5 per cent interest rate, you would earn £890 a year tax free.
Due to their safe nature Britons have invested billions into ISAs, money that Reeves wants to see moved into more lucrative investments like stocks and shares, which are riskier.
To do this, the Chancellor is considering slashing the tax-free limit from £20,000 to £4,000 on cash ISAs, senior city executives have confirmed.
How much this would cost you depends on what sort of cash ISA you have and crucially its interest rate.
For example, if you had £20,000 in an ISA with a 4.5 per cent interest rate, you would earn £890 a year tax free.
GB News analysis of a £4,000 limit on cash ISAs has revealed the following amounts would be lost.
Amounts ISA holders would lose if tax free cap was lowered from £20,000 to £4,000
Amounts ISA holders would lose if tax free cap was lowered from £20,000 to £4,000
GBN
It reveals if you had £20,000 in a Post Office ISA offering a 4.4 per cent rate, you would earn £888 per year tax free.
But if that limit was slashed to £4,000, the earnings would fall to £176, a loss of £704 per year.
For a more lucrative ISA such as the one currently offered by Plum (5.05 per cent), £20,000 investment would have earnt £1,010 per year tax free, but with the £4,000 cap that falls to £202 per year, a loss of £808.
Amount lost to £4,000 limit on tax free earnings for different types of ISAs
Amount lost to £4,000 limit on tax free earnings for different types of ISAs
GBN
Commentators have warned the move could affect pensioners disproportionately as they tend to prefer investing in safe, steady ISAs.
Under Reeves’ plans, pensioners would be forced to move their money into something like stocks and shares which, because of their riskier nature, could cause undue stress and in some cases lose money.
The alternative is to surrender much of their ISA earnings to the taxman.
Fidelity International, a huge financial firm that manages £710bn in ISA, echoed calls for an overhaul and backed the £4,000 limit.
It wants is all the various types of ISA to be amalgamated into one type.
James Carter, head of platform product policy at Fidelity International, said: “The entire UK Isa regime should be reviewed with the aim of simplifying it for consumers. This should include consolidating the different types of Isa into one product.
“The current proliferation of Isa types can also limit the economies of scale that providers can offer.
“This can stifle innovation and worse, raise costs for end investors. Simplification and certainty of tax treatment can allow both savers and companies to better plan and manage the products.”
The Telegraph reported a city source who had been part of the conversation with eh Treasury said: “It was a good conversation with a lot of focus on how to make little adjustments to further stimulate the equities market and create more of an investment culture.
"Lots of positive tone from participants on the progress made around capital markets reform so far.”
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Chancellor Rachel Reeves said: “I am determined to go further and faster to drive growth and put more money into people’s pockets through our Plan for Change.
“Speeding up the settlement of trades makes our financial markets more efficient and internationally competitive.”
This is not the first time ISA reform has been in the news. A few weeks ago reports indicated Reeves was considering subjecting ISA earnings to income tax to persuade people to invest their money in something else.
ISA reform news has led to a wave of savers opening ISA accounts to try and beat Reeves’ reforms.
Hargreaves Lansdown revealed that between ISA reform news first breaking and February 12, 56 per cent of accounts opened with them were cash ISAs.
Payments into cash ISAs, which allow savers to hold up to £20,000 a year tax-free, were up 325 per cent in 2025 so far compared to last year, the savings platform said.
The Treasury has been approached for comment.
