Rachel Reeves warned against ‘foolish' tax raid on cash Isas
The head of one of the country's largest building societies has warned Rachel Reeves that cutting cash Isa limits would be 'foolish'.
The Chancellor is looking at reducing the annual tax-free allowance for the savings accounts from £20,000 to £4,000, in an effort to encourage more retail investment.
But Stuart Haire, the boss of Skipton Building Society, said it was 'flawed logic' to assume that reducing the Isa allowance would boost investment, The Times newspaper reported.
Mr Haire said: 'This idea that you would scrap or reduce the allowances for cash Isas and maintain or increase for equity Isas is a foolish idea. It is not the right way to do it. It is a clear consumer preference to put money into cash Isas.'
He added: 'The thought that people would suddenly go, 'I'm not going to put it into a cash Isa, I'll put it into an equity Isa,' I think is a flawed logic. It's not what we see in our members' behaviour.'
There are four main types of Isa: cash, stocks and shares, innovative finance and the Lifetime Isa (Lisa). The current rules allow savers to open multiple Isa accounts over the tax year and save £20,000 across them without paying tax on their returns.
Mr Haire's comments were echoed by Martin Lewis, the Money Saving Expert founder, who said yesterday the cash Isa limit should remain untouched.
Mr Lewis told a select committee hearing yesterday: 'I think there is this concept that if you stop people saving in cash they will put it in stocks and shares, which is false.
'I think it's also worth remembering we've had a long time of ultra-low interest rates, for which the people who worked very hard to put their money away in savings were penalised effectively.
'They're finally getting something back. Many people who have worked hard all their lives and are living off that income, if you squeeze what they can take out of savings, either by lowering interest or by taxing them, then people have less money to spend.'
Bosses of some of the country's largest, including Coventry Building Society, Leeds Building Society and Yorkshire Building Society, warned last week that the change would have a damaging impact on pensioners and mortgages.
Richard Fearon, the chief executive of Leeds Building Society, said: 'It's naïve at best, or deliberate misinformation at worst, to say money saved in cash Isas is dormant – we and all building societies use it to fuel our mortgage lending.
'If you reduce that funding, mortgage rates would become more expensive for borrowers.'
Pensioners often prefer to keep their money in cash so that it is easily accessible for emergency spending and because they have less time to ride out market fluctuations.
Jeremy Cox, of Coventry Building Society, said: 'Using the tax system to nudge savers into stocks and shares could have dangerous consequences.
'Taxing more of people's cash savings, particularly pensioners and those nearing retirement, feels like a very unpopular policy idea.'
Analysis by The Telegraph and accountancy firm Blick Rothenburg revealed that the changes would bring in just £202m for the Treasury.
Assuming that money over the proposed £4,000 limit was put into a cash savings account that was not protected from tax, generating 5pc interest, HM Revenue & Customs (HMRC) would be owed an extra £201,953,750. But the real return for the Treasury is likely to be much lower, as many savers are likely to return their money to low-paying current accounts.
Some £276bn is held in accounts where low inflation rates and high inflation eat away at the value of savers' money, according to Bank of England data. This could lead to losses of £9.6bn in interest over the next year, property investment firm CapitalRise estimated.
Anna Bowes, savings expert from The Private Office said: 'The amount of tax being raised from non-Isa savers has already soared over the past few years, as there is more than £1.4 trillion in savings outside a cash ISA wrapper.
'In the 2022 to 2023 tax year, HMRC raised £3.9bn from cash savers, but this has escalated to more than £10.3bn – £200m therefore seems like a drop in the ocean.'
James Blower, of the Savings Guru, said: 'For the upset and rancour this will cause it really doesn't make any sense for the Treasury to do. I think the danger, with such a low allowance, is savers don't value it at all and small ones don't bother because it isn't perceived to be worth the hassle.'
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