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Big City firms are urging Rachel Reeves to scale back tax breaks for cash Isas, a form of saving beloved by millions of Britons, in an effort to boost UK financial services and the economy by channelling money into stocks.
Companies including insurance group Phoenix and the London Stock Exchange Group have told the chancellor that almost £300bn held in cash Isas could generate better returns for savers if invested in stocks and shares, while supporting the City’s dwindling equities market.
One senior banker said the issue had been raised by several finance executives at a recent meeting with Reeves and that she had not rebuffed the idea.
“The state should not be giving a tax break for us all to park our money in cash,” said Andy Briggs, chief executive of Phoenix, which operates the Standard Life brand.
“I am hopeful that 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,” added Briggs, who was at the meeting.
Scrapping the cash Isa would be the biggest shake-up of the savings market since the products were first introduced by then-Labour chancellor Gordon Brown in 1999.
Cash Isas allow savers to earn tax-free interest on up to £20,000 a year and are by far the most popular of the UK’s Isas. Surveys show that many Britons prefer keeping wealth in cash rather than investing in the stock market because they view it as safer.
One Treasury official lobbied on scrapping cash Isas by City firms said “they also like the idea that it could provide growth for their asset management arms. They say there is a huge amount of capital that could be doing much more.”
People close to the discussions said Reeves would be reluctant to change a popular form of savings, but the idea has not been ruled out.
“They are quite important products for a lot of people so changing cash Isas would be quite a big deal,” said another official.
The UK offers several different Isas, including a product for cash and another for stocks and shares
But the financial services industry has raised concerns that cash Isas are housing money that could be earning more in London-listed companies while supporting the UK’s capital markets. Banks earn fees by helping companies sell shares to retail and institutional investors, while asset managers have suffered in recent years from investors pulling money from their UK equity funds.
Steven Fine, chief executive of investment bank Peel Hunt, told the FT that he had “consistently been in touch” with the Treasury about Isa reform, “ideally to limit or remove cash, with the balance in London-listed stocks and shares.”
Another banker said that the government could limit the amount of cash held within an Isa, for example up to £5,000, while the remaining, larger portion could be held in stocks and shares.
The chair of a UK asset manager said the industry has been calling for Isa reform, noting that there should be “a single Isa, encouraging people to have more allocated into British stocks and shares.”
The Treasury said: “We want to help people save for their future goals and build greater financial resilience across the country. We keep all aspects of savings policy under review.”
According to an LSEG spokesperson, the group was not at the meeting with Reeves where the topic of ISAs was discussed.
About 14mn of the UK’s 22mn Isa holders held cash Isas alone, according to analysis of the most recent HM Revenue & Customs’ data, from 2021-22, by AJ Bell, a financial platform. Some 4.2mn investors held only stocks and shares Isas and 3.6mn had both cash and stocks and shares accounts.
Of the £726bn held in adult Isas, £431bn is held in stocks and shares and the remainder is in cash Isas, according to AJ Bell’s analysis of HMRC data for 2022-23.
