ISA savers 'could face major changes as soon as next week'

Rachel Reeves could reportedly be set to reveal plans to slash the current annual tax-free cash ISA limit next week, amid growing speculation that the government aims to cut it to £5,000.

The current cash ISA system allows savers to put away up to £20,000 each tax year, with all the interest earned remaining untaxed.

Besides the popular cash ISA, savers can also spread their annual £20,000 allowance into other types of ISAs, such as Stocks and Shares, Innovative Finance, and Lifetime ISAs.

Yet the Financial Times has reported discussions within the government about decreasing the cash ISA threshold significantly.

Despite no confirmation from the Treasury, there are suggestions that the Chancellor may unveil these changes during her much-anticipated Mansion House speech scheduled for July 15, reports the Mirror.

This potential move aligns with comments from Emma Reynolds, Economic Secretary to the Treasury, who has encouraged greater investment in stocks rather than cash savings.

Stocks and shares ISA investments differ from cash ISAs in that they yield returns based on the performance of invested companies rather than a fixed interest rate.

In relation to the rumours, finance guru Martin Lewis has aired his thoughts on X: "Reports @RachelReevesMP will announce a cut to the cash ISA limit at her 15 July Mansion House speech.

"If true, I think it's a mistake. I doubt it'll substantially nudge people to invest not save; said to be the aim... Currently you can put £20,000 in tax-free ISAs, whether cash (savings) ISAs, shares (investments) ISAs or the smaller types.

"It's said the reduction'd only be for cash ISAs, so people can still invest the same tax free. NB At this point I should note, it is v likely to only impact future ISA limits (though whether the cut would start this tax year is a big question) so those with money already in cash ISAs shouldn't panic."

The Treasury revealed in the recent March Budget that they are exploring potential "options for reforms" for the cash ISA system.

Speaking with the BBC earlier in May, Ms Reeves said: "I'm not going to reduce the limit of what people can put into an ISA, but I do want people to get better returns on their savings, whether that's in a pension or in their day-to-day savings.

"And at the moment, a lot of money is put into cash or bonds when it could be invested in equities, in stock markets, and earn a better return for people. But I absolutely want to preserve that £20,000 tax-free investment that people can make every year."

Savers have been at increased risk of paying tax on the interest from their savings as rates have improved over recent years. However, it's not a requirement for everyone to pay tax on savings interest.

If you're a basic-rate taxpayer, you can earn up to £1,000 in savings interest each tax year before you're required to pay tax. The threshold for higher-rate taxpayers is £500, while additional rate taxpayers don't receive any allowance.

You would start to pay interest on the money earned from your savings once these thresholds are exceeded.