UK Government Considers Cutting Tax-Free Cash Isa Allowance
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The UK government is contemplating reducing the £20,000 tax-free cash Isa allowance as part of a broader effort to encourage savers to invest in London-listed stocks. According to sources familiar with the matter, City minister Emma Reynolds discussed reforming the Isa market with senior executives from major banks, including HSBC, Barclays, and NatWest, on Thursday.
The meeting, which also included Lloyds Banking Group, Nationwide, and TSB, is part of a series of discussions between the Treasury and the City on reforming the Isa market. The government is seeking to funnel more money into equity funds and domestic shares, with some City groups strongly lobbying for a reduction in the tax-free cash allowance.
“It’s still a decision they’re [the Treasury] grappling with as part of a wider discussion on how do you best encourage people to save for the future,” a person familiar with the meeting told the Financial Times.
The Financial Times reported over the weekend that the government is preparing to launch a review of the market, with a view to encouraging savers to move from cash to investments and boost London’s ailing stock market.
Under the current regime, individuals can hold up to £20,000 a year in a mix of cash and investments free of income and capital gains tax. There are four main Isa products, of which cash is by far the most popular, with £300bn of savings.
Any move to cut the tax-free cash threshold would mark one of the biggest shake-ups in the UK’s savings markets since Isas were created by then Labour chancellor Gordon Brown in 1999. Savers poured £4.2bn into cash Isas in March, up by almost one-third compared with the previous year, according to investment site Hargreaves Lansdown.
The Treasury had scheduled another meeting on Monday with chief executives of retail investment sites, including Dan Olley from Hargreaves Lansdown and Michael Summersgill from AJ Bell, according to people familiar with the plans. The discussion was expected to focus on cash and investing, as well as investing in UK assets.
In a statement to the Financial Times after the meeting, chancellor Rachel Reeves said: “At the moment, there is a £20,000 limit on what you can put into either cash or equities, but we want to get that balance right.” She added that she wanted to create “more of a culture in the UK of retail investing” in order to “earn better returns to savers and to support the ambition to grow the economy, creating good jobs right across the UK”.
Fidelity International is among the groups to have called on the government to create a single Isa within which people can switch between cash and investments, while capping the annual amount that can be saved in cash at £4,000. However, others have pushed back on the idea of capping the tax-free cash allowance, warning that the change would not spur investment into UK equities.
UK Finance, a trade body, said recently that it wanted to “retain the annual tax-free cash Isa allowance of £20,000, to avoid restricting consumers’ options”.
The government’s review of the Isa market is expected to be a key factor in shaping the future of the UK’s savings industry. As the Financial Times reports, the outcome of the review could have significant implications for savers and investors in the UK.
Additional reporting by Akila Quinio in London.
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