Rachel Reeves told MPs last month that Isa reform ‘would be worthwhile’ - Ben Whitley/PA Wire
Banks have urged the Chancellor to drop her plans to cut the tax-free Isa savings allowance.
Rachel Reeves has been lobbied by City executives to “leave Isas alone” as she prepares to overhaul the savings product used by millions.
Isas allow people to save up to £20,000 each year with no tax charged on any interest or capital gains earned from the account. Savers mostly keep their money in either cash or stocks-and-shares Isa accounts and can spread the annual allowance across them.
The Chancellor is considering lowering the annual tax-free allowance for cash Isas, which are held by 18m people, in an effort to push more people to invest in shares. She has considered lowering the allowance to as little as £4,000.
The change would mean millions would be able to save less each year tax-free and would face a choice between putting money into savings accounts subject to tax or investing in riskier stocks.
It comes as Ms Reeves seeks for ways to boost growth. The Chancellor told MPs last month that Isa reform “would be worthwhile”.
Treasury ministers have held meetings with banks and building societies about the changes in recent weeks, with more planned in the coming days.
Emma Reynolds, the economic secretary to the Treasury, met with representatives of HSBC, NatWest and Lloyds banks on Thursday, as well as the Building Societies Association, which represents Co-operative Bank and Nationwide, among others.
Ms Reynolds was warned that the changes would leave savers including pensioners facing higher tax bills and would do little to boost growth.
Stuart Haire, the Skipton Building Society chief executive, told The Telegraph that the Chancellor should “leave cash Isas alone”.
He said: “We agree with the Government that people in the UK should increase, if they have the wherewithal and the risk appetite, the amount of money they have got in equities.
“However, changing the cash Isa limit will not do that, so therefore it’s the wrong tool to achieve the policy outcome.”
Mr Haire has met with Treasury officials and ministers on a number of occasions to discuss the issue and said the Government was aware of the industry’s concerns.
David Postings, the chief executive of UK Finance, which represents both banks and building societies, said: “Getting more people investing is the right thing to do, but we should do it in a positive way rather than restricting options such as the ability to invest in cash Isas.
“They are an easy-to-understand product that help individuals start saving and set aside money for the future. The money banks and building societies hold in cash Isas is also lent out, supporting borrowers and the wider economy.”
Robin Fieth, the chief executive of the Building Societies Association, said: “Simply changing Isa limits is unlikely to change savers behaviour and will do little if anything to boost investment.
“Ideally the well-understood £20,000 Isa limits should be left alone.”
One source with knowledge of the meetings between industry and ministers speculated that Ms Reeves’s plan may also be motivated by a desire to boost the Treasury’s tax revenues at a time when high interest rates mean savings accounts are generating particularly high returns.
“When Isas were introduced, interest rates were very low, so the amount of tax they would be losing would be lower,” they said.
Andrew Griffith, the shadow business secretary, suggested that the plan was an effort to boost tax receipts at a time of intense pressure on public finances. He accused Ms Reeves of preparing a “mad, penny-pinching grab by the Treasury”.
Ms Reynolds was told by banking executives at this week’s meeting that the public prefers cash to shares and would simply shift into traditional savings accounts if the limit was lowered.
As a result, the reforms would do little to boost growth but would leave millions of savers facing higher tax bills. Around 30pc of people in the UK currently hold some savings in a cash Isa account.
“People choose cash,” the source close to the talks said. “People, particularly pensioners, want to be able to get hold of their money.”
Rachel Springall, of Moneyfacts, said: “Fundamentally there will be savers out there who do not want to be forced to place their hard-earned cash in a pot which could be at risk.”
James Blower, founder of Savings Guru, said: “As a nation, we are more risk-averse and like the safety and security of cash with guaranteed returns.”
He said that even savers who did not hold enough money to be faced with a tax bill if they did not use Isas had historically used the product because of a “romanticism” around tax-free savings.
Ms Reynolds was warned that slashing the Isa allowance also risked damaging building societies because of rules requiring that they fund mortgage lending through customer deposits. Half of funding must come from deposits, of which 40pc is derived from cash Isas.
The same rules also restrict building societies from offering various investment products including stocks-and-shares Isas, meaning any decision to lower the tax-free allowance could lead to a drop in their deposits.
A source close to the negotiations said: “Reducing the limit cash Isa and not for stocks and shares will benefit fund managers who do stock investments. If the amount you can save in cash goes down, building societies in particular will lose out.”
There are 42 building societies in the UK, typically offering savings accounts and mortgages, serving approximately 26m customers.
The Government is expected to launch a review of the Isa market in the coming weeks, it has been reported.
Further meetings between ministers and large investment managers such as AJ Bell and Hargreaves Lansdown are planned for early next week.
Investment platforms are lobbying for the tax-free allowance to be reduced as they stand to benefit from any changes that could drive cash towards stocks. Telegraph analysis shows that the investment industry could make as much as £270m in fees from the proposed changes.
Some stock brokers have argued for the introduction of so-called hybrid Isas that would let customers save cash and invest in stocks through the same account.
However, building societies have opposed the plans as they would be unable to offer such products.
Speaking at the Building Society Association’s annual conference in Birmingham last week, Ms Reynolds said there had been “a tremendous amount of speculation about” Isa changes.
She said: “I absolutely appreciate that people need a financial buffer for a rainy day, and we all do. Many of us have cash Isas and cash savings. And there’s a reason for that. You could lose your job – I lost my job in 2019. We understand that cash savings play a very important role.”
A Treasury spokesman said: “We want to support people to save and absolutely recognise the important role that cash savings play in building a buffer for a rainy day.
“We also want to ensure that savers are getting the best returns possible, while boosting the economy to create jobs right across the UK. No decisions have been made.”
