Rachel Reeves update on '£20,000 ISA axe' but BBC expert says cash ISA still under threat

Rachel Reeves has backpedalled on her intentions to slash the tax-free Isa allowance, heeding to intensifying pressure from the financial district.

The Chancellor has given her assurance that the annual £20,000 ISA limit will stay put, which comes as welcome news to innumerable savers.

This policy reversal emerged after a barrage of pushback from banking institutions regarding the mooted adjustments, including proposals to cut the allowance down to £4,000 to incentivise stock market investments and bolster economic impetus.

Speaking to the BBC, 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."

In her pledge to keep the £20,000 tax-free Isa allowance intact, Rachel Reeves has also hinted at potential modifications to motivate increased investments in stocks.

Speaking to the BBC, she remarked, "Right now, a lot of savings are going into cash or bonds when they could be earning better returns in equities and the stock market," and affirmed, "But I absolutely want to preserve that £20,000 tax-free investment that people can make every year."

Around 18 million Britons utilise Cash Isas to accrue interest without the burden of income tax, but concern has been raised by Emma Reynolds, Economic Secretary to the Treasury. Addressing the House of Lords in February, she exclaimed: "Why have we got hundreds of billions of pounds in cash Isas? We have failed to drive an investment culture," adding a note of alarm over the impact on the London Stock Exchange.

Subsequently, the Treasury announced plans for an in-depth review of the Isa system before the Autumn Budget is presented, after Reeves had previously indicated to MPs that a thorough overhaul "would be worthwhile."

Whilst the Chancellor has dismissed any notion of reducing the £20,000 Cash Isa cap, she hinted at potential changes that could nudge savers towards stocks and shares Isas, potentially invigorating the UK capital markets.

Significant support for this reform has been forthcoming from heavyweight investment entities such as Fidelity International.

And just this Monday, Chancellor Rachel Reeves made it clear: "One of the reasons we're reviewing the advice and guidance that financial firms can offer is to ensure people are making informed choices about how to invest their money, whether that's through pensions or ISAs."

Nonetheless, the choice to keep the existing Isa allowance comes after significant resistance from banking chiefs. Just last week, top brass cautioned Economic Secretary Emma Reynolds that the majority of savers favour the stability of cash over the unpredictability of shares.

They warned that reducing the £20,000 Isa limit would likely prompt households to transfer their savings into regular bank accounts, thwarting attempts to direct more capital into the stock market.

BBC Money Box presenter Paul Lewis initially thought that the announcement was preserving cash ISAs and said on X: " BBC reporting that Chancellor Reeves has ruled out reducing the £20,000 annual limit on money being paid into a cash ISA. So those with lots of £20,000s waiting to go to tax free savings can schedule annual payments! Find best deal and fix for a year if you can (currently 4.27%)

But he then added: " This is not correct. It was the overall ISA limit she said she was not changing and she went on to say "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" so she may still slash the cash element".

"Also note that money invested "in equities, in stock markets" will not necessarily produce a better return than cash. Ask a financial adviser to guarantee you 4.27% returns (as cash will today over 1 year) and they cannot do it."