Chancellor Rachel Reeves is facing a stern warning from MPs over her controversial proposal to significantly reduce the annual tax-free savings limit for millions of Britons.
The Budget Proposal and Its Aim
In last year's Autumn Budget, Chancellor Rachel Reeves unveiled plans to cut the total ISA allowance from £20,000 to £12,000. The government's stated intention behind this move is to steer more personal savings towards investments in the stock market. Under the proposed changes, the remaining £8,000 of the reduced allowance could only be placed into a Stocks and Shares ISA, not a cash ISA.
The Treasury, represented by Economic Secretary Lucy Rigby, defends the policy. It argues the measure is part of a series of "bold" reforms designed to "get Britain investing again" and to help more people secure the "higher returns and long-term financial resilience" that investing can offer.
MPs and Experts Voice Serious Concerns
However, a parliamentary committee has directly challenged the Chancellor's logic. MPs have cautioned that reducing the cash ISA allowance is "unlikely" to persuade risk-averse savers to move their money into stocks and shares. This warning was issued both before and after the Budget announcement.
Financial planner Henrietta Grimston of Saltus, a retirement planning group, explains the potential fallout. She highlights that clients with substantial cash ISA holdings typically prioritise security, flexibility, and peace of mind over high returns. For them, cash ISAs represent a simple, low-risk way to manage savings without exposure to market volatility.
"Reducing the allowance risks penalising these sensible savers," Ms Grimston stated, "making it harder to build tax-efficient pots for the future."
Who Stands to Lose the Most?
The changes could have a disproportionately negative impact on specific groups. Those approaching retirement are identified as being particularly vulnerable. With a smaller tax-free wrapper available, more of their savings growth could become subject to tax, effectively reducing the efficiency of their retirement plans.
Ms Grimston warned this could force individuals to save more to hit the same target. Furthermore, it might push many into more complex tax situations, potentially requiring them to submit tax returns for the first time, which adds administrative stress and the risk of costly errors.
Instead of cutting allowances, experts suggest alternative reforms. Ms Grimston proposed that the government consider making targeted products like the Lifetime ISA (LISA) more flexible to adapt to changing life circumstances. A broader review of ISA rules, especially for the LISA and Innovative Finance ISA, was suggested as a more positive step to help savers navigate their options effectively.
The debate underscores a fundamental tension in government policy: the drive to stimulate investment in the UK's capital markets versus the need to protect and encourage prudent, accessible saving for all citizens, regardless of their appetite for risk.
