While no changes to tax allowances were announced in the Spring Statement today, the government said it is planning to reform the structure of Individual Savings Accounts (ISAs) to “get the balance right” between cash and equities.
Reeves steered clear of mentioning ISAs in her statement to parliament, but the accompanying document outlined plans for a consultation on the popular savings wrapper.
In the document, the government said: “The government is looking at options for reforms to Individual Savings Accounts that get the balance right between cash and equities to earn better returns for savers, boost the culture of retail investment, and support the growth mission.
“Alongside this, the government is working closely with the Financial Conduct Authority to deliver a system of targeted support to give people the confidence to invest.”
The current total ISA limit has been £20,000 a year since the 2017-18 tax year. At the moment, savers can choose whether to keep it all in one account or allocate it between a cash ISA or a stocks and shares ISA. In addition, there is a £9,000 Junior ISA allowance for children under 18. A Lifetime ISA allowance of £4,000 is also available for those under 40, but this counts towards your overall annual allowance. When the ISA launched in 1999, the cash allowance was £3,000 a year.
Labour committed to simplifying the ISA structure as part of its election campaign in 2024 to drive up the allocation to UK equities and revive the domestic stock market. Cash ISAs remain by far the most popular form of ISA, and media speculation ahead of the Spring Statement focused on the potential for a drastic cut to the £20,000 allowance.
ISA Consultation: Investment Industry Reacts
Jamie Jenkins, director of policy at Royal London says: “The focus will be on generating greater investment in the UK economy, and specifically growth sectors. We can expect more detail on this in the coming weeks.”
Michael Summersgill, chief executive of AJ Bell, says that while scaling back cash ISA allowances could push people towards investing, AJ Bell research found that only one-in-five people said they would invest in the UK stock market instead if the cash ISA allowance was reduced or abolished.
He suggests three key reforms that could “bring us a step closer to Reeves’ aim of a retail investing revolution”:
• Enable financial services firms to give customers more useful nudges about their finances through “targeted support” reforms.
• Review and simplify the ISA landscape to boost retail investing through combining cash ISAs and stocks and shares ISAs into one product.
• Review the impact of stamp duty on UK shares (a reform which would cost around £120 million).
Should Cash ISAs be Capped?
Jason Hollands, managing director at Evelyn Partners, says: “The key question is at what level a cap might be set. An annual cash limit of £10,000 for instance would not impact many cash ISA savers but a £4,000 limit, which has been speculated on, would prove a blow.
“While recent attention has been on cash ISAs, there is a wider concern. If you follow the argument through that City firms have been encouraging the chancellor to curtail cash ISAs to drive more cash to boost economic investment (rather than specifically achieving better returns for the saver), then it begs the question as to what Rachel Reeves might be thinking about stocks and shares ISAs as well?
“After all, the current government’s interventionist logic might lead it to conclude that tax incentives should be used to encourage investment into UK markets, not US or overseas businesses like Nvidia NVDA, Apple AAPL or Microsoft MSFT.”
Fixing the UK’s Capital Markets Issues
Meanwhile, Tim Service, investment manager, UK small and mid cap at Jupiter Asset Management, adds that reforms to reinvigorate the UK equity markets should not be underestimated. “For the first time in a long while, there appears to be a joined-up attempt to fix the problems in UK capital markets, between Treasury, the Stock Exchange and the regulators.”
The list of initiatives now ranges from a loosening in UK listing rules, a clear mandate shift for multiple regulators, an unwinding of some governance red tape, multiple workstreams to encourage more UK savings money back into the domestic market, and now, discussions about cash ISAs, pension tax reliefs and stamp duty.
“Will all of these bear fruit? No. But what feels most relevant is the sheer weight of initiatives and collective will behind them, set against almost universal skepticism of their success. Watch this space.”
The author or authors do own shares in any securities mentioned in this article. Find out about Morningstar’s editorial policies.
