Chancellor John Healey has scrapped the government’s policy of implementing a £12,000 per year limit on cash ISA contributions as part of his first Budget.
Healey began his speech by paying tribute to his predecessor Rachel Reeves, but his regard for her did not stop him tearing up one of her most notable Budget measures.
The move had long been criticised as adding complexity and discouraging people from saving, rather than having the desired impact of increasing the number of people investing.
Healey appears to have taken a view along these lines, and has instead announced the government will work with the industry on creating a ‘starter ISA’ for first time investors. He did not provide further details in his address.
The u-turn on the policy brought in by Reeves represents a surprising climbdown, but a welcome one for the investment industry.
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Fiona Clark, tax partner at Goodman Jones, said: “The u-turn on cash ISA allowances is a sensible rethink of a policy that risked creating more problems than it solved.
“Making it harder to save in cash was never going to guarantee that more people would invest in the stock market. Instead, the proposed cuts threatened to add another layer of complexity to an already complicated system, while limiting choice for those who value the security and flexibility of cash savings.
“Encouraging more people to invest in UK equities is a worthwhile ambition, but restricting cash savings is not necessarily the way to achieve it,” she added.
“Savers have different needs and appetites for risk, and the ISA system should reflect that.”
Jason Hollands, managing director at Bestinvest by Evelyn Partners, said: “The government had argued that the rationale for cutting the cash ISA allowance was to steer more people to invest, rather than it being a revenue raising measure.
“Encouraging more people to invest is a worthy and welcome project but cutting the amount people can save in a cash ISA seemed like a blunt instrument to try and achieve this. Further complications around flagged anti-circumvention measures for investment ISAs threatened to damage understanding of and trust in both products.
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“Getting more people to invest requires a cultural shift, better education, the new targeted support regulatory regime to bed in and more creative ways to make investing more accessible to more people, eg through exploring ideas like offering regular investing schemes through the workplace.”
Winston Ruddick, senior financial planner at Broadstone, added: “Protecting the £20,000 cash ISA allowance is welcome news for savers, preserving their ability to build tax-free savings without taking on additional investment risk.
“While encouraging more people to invest is a sensible ambition that could boost long-term returns and channel more capital into UK equities, restricting access to tax-efficient cash savings was always a blunt instrument to achieve this,” Ruddick added.
“Cash ISAs are a simple, accessible and widely understood savings product, often providing a first step towards building longer-term savings habits and financial security. They play a vital role in financial planning, particularly for those with shorter-term savings goals or a lower appetite for risk.”
Not every firm in the industry agrees with the Chancellor’s decision though.
Adrian Murphy, CEO of Murphy Wealth, said: “Scrapping the planned reduction in cash ISA allowances is a backward step at a time when the UK should be doing everything it can to encourage a stronger culture of long-term investing.
“While cash savings are an essential part of good financial planning, they are not always the most effective way of building wealth over time. We’ve made real progress in helping people understand the benefits of investing, and this move risks slowing that momentum.
“The danger is that many savers will continue to prioritise the perceived safety of cash without fully appreciating the long-term opportunity cost of missed returns.”
