“`html
A group of MPs has strongly cautioned Chancellor Rachel Reeves against reducing the tax-free allowance for cash Individual Savings Accounts (ISAs) in the forthcoming Budget.
The Treasury Select Committee, in a recent report, argued that cuts to the tax-free allowance were unlikely to achieve the desired outcome of fostering a stronger investment culture in the UK.
With Chancellor Reeves anticipated to unveil tax increases or spending cuts in the next month’s Budget, reports suggest that potential changes to cash ISAs are under consideration.
In response, the Chancellor stated: “My understanding is that the report suggests that changes to ISAs shouldn’t be made in isolation of other policies. I’ll be setting out any tax changes in the budget in November. And of course we need to get that balance right.”
Reeves further commented: “At the moment, often returns on savings and returns on pensions are lower than in comparable countries around the world, and I do want to make sure that when people put something aside for the future, they get good returns on those savings.”
Earlier this year, the Chancellor was believed to be contemplating a reduction in the tax-free cash savings allowance, with the aim of incentivizing investment in stocks and shares to stimulate economic growth.
However, these plans were reportedly shelved following significant opposition from banks, building societies, and consumer advocacy groups.
Currently, savers can deposit up to £20,000 annually into ISAs, encompassing both savings and investments, to shield returns from taxation.
The Chancellor has affirmed her intention to maintain this overall limit, which can be allocated across various products, including cash ISAs and stocks and shares ISAs.
The proposed modification specifically pertains to cash ISAs. Earlier this month, the Financial Times reported that the Chancellor was considering reducing the tax-free amount for these accounts to £10,000.
The rationale behind this adjustment is to encourage greater investment activity.
The Chancellor is navigating an estimated £22bn Budget shortfall, according to recent assessments.
To adhere to her self-imposed fiscal regulations of avoiding borrowing for day-to-day spending and reducing government debt as a proportion of national income by the end of this Parliament, she is expected to implement tax increases or spending cuts in her November Budget.
Cash ISAs are the most prevalent type of ISA, with a total of £360bn held in these accounts nationwide.
The Committee’s report concluded that “cutting the cash Isa allowance is unlikely to incentivise people to invest their cash in stocks and shares”.
Dame Meg Hillier, Chair of the Treasury Select Committee, stated: “This is not the right time to cut the cash Isa limit.”
“The Committee is firmly behind the chancellor’s ambition to create a culture in the UK where savers are sensibly investing their money and getting better returns through well-informed financial decisions,” she said.
“But we are a long way from that point.”
Dame Meg suggested that the government should instead prioritize “a comprehensive effort to genuinely improve financial education and establish accessible, high quality financial advice and guidance for people”.
“Without this, I fear that the Chancellor’s attempts to transform the UK’s investment culture simply will not deliver the change she seeks, instead hitting savers and mortgage borrowers.”
Reducing the tax-free allowance for cash ISAs would likely be unpopular among many savers, particularly older ones who are less willing to take risks with their money.
Instead of cutting the cash Isa tax-free limit, “the focus should be on improving financial literacy … so that people can make informed decisions with their savings”, the committee said.
The report found that cutting the allowance would have negative knock-on effects for consumers, as building societies depend on cash Isas for their mortgage lending.
“If this was reduced, it would mean a less competitive market for financial products and consequently higher prices for consumers,” the committee said.
BBC News has contacted the Treasury for comment.
The Treasury Committee says the complex product, used by first-time buyers, needs an overhaul.
Chancellor Rachel Reeves has shelved plans to alter Isa rules, but what are they and how do they work?
There had been reports in recent weeks that the chancellor was going to cut the £20,000 limit.
MPs call for reform to the savings account which aims to help people save towards retirement or a first home.
Here’s what you need to know about Chancellor Jeremy Hunt’s tax and spending plans for the year ahead.
“`