The Chancellor has been urged to slash the tax breaks available on cash ISAs in a bid to boost the economy and support London’s dwindling stock market.
Cash ISAs are by far the most popular type of savings account in the UK, allowing savers to earn tax-free interest on contributions of up to £20,000 a year.
Figures from HM Revenue & Customs show that around 18 million people currently have a cash ISA, with those accounts shielding around £294bn from the taxman.
However, City firms are lobbying Rachel Reeves to limit or scrap the tax relief available on cash ISAs to persuade people to put their money in tax-free investment accounts, known as stocks and shares ISAs, instead.
They argue this would not only generate better returns for savers but also boost the economy by driving more investment into firms listed on the London Stock Exchange, which suffered an exodus of firms last year.
However, if tax relief was scrapped on cash ISAs, some savers could be hit with tax bills of more than £2,000, according to figures from The i Paper.
Andy Briggs, chief executive of savings and retirement firm Phoenix, told the Financial Times: “The state should not be giving a tax break for us all to park our money in cash.
“I am hopeful that [Chancellor] Rachel Reeves will conclude that it makes sense to refocus ISA tax incentives to make them consistent with the Government’s very welcome growth agenda.”
Any move to remove the tax breaks available on cash ISAs would amount to the biggest shake up of the savings market since they were first introduced in 1999.
Given the popularity of cash ISAs, it would also be likely to be an unpopular move.
Building societies have also raised fears that any initiative designed to make cash savings less appealing could have a negative impact on the price and availability of mortgages.
That’s because cash ISAs are an important source of funding for banks, building societies, credit unions and other providers, who use the deposits to fund loans to households and businesses.
Robin Fieth, Chief Executive of the trade body the Building Societies Association, says: “Cash ISAs help consumers to achieve their savings goals. They play an integral role in the UK savings market and have done for many decades. They represent a policy success upon which we should seek to build, rather than to curb.”
What should you do next?
In short, you don’t need to do anything yet.
Just because firms are calling on the Chancellor to slash the tax relief offered on cash ISAs, it doesn’t mean she will act on that advice.
And that means that you will continue to earn interest tax-free in your cash ISA until the Government says otherwise.
ISAs have become so popular that any move to water down their benefits would likely be met with significant resistance.
That said, historical data shows you can achieve far higher returns by investing in equities than you can parking your money in a cash savings account.
Therefore, if you hold large amounts in cash savings accounts, you may want to ask if your money could be working harder for you.
Research by AJ Bell, the investment company, shows that a £1,000 investment in the low-cost fund tracking the FTSE 100 index 10 years ago would now be worth £1,851, compared with £1,137 generated by the average cash ISA.
If you had invested in a low-cost fund tracking the US or global stock markets, your returns would have been even greater, as both have significantly outperformed the UK over that period.
As a rule of thumb, you should look to hold at least three to six months’ worth of outgoings in an easy-access cash savings account to cover emergencies.
Beyond that, most people would benefit from parking their money in assets that generate a better return than cash, such as equities and certain types of bond.
If you feel that your money could be working harder for you, it’s worth seeking professional advice if you want to discuss what options are most suitable for you and your financial goals.
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