Roula Khalaf, the Editor of the Financial Times, curates selected stories in a weekly newsletter, the Editor’s Digest. Rachel Reeves, according to informed sources, is set to initiate a review of the Individual Savings Account (Isa) market to encourage savers to invest more tax-free cash into British stocks. The Treasury plans to consult with stakeholders in the City of London about potential reforms to the UK’s Isa framework. This initiative seeks to enhance the culture of retail investing within the country.
The proposal could result in significant changes to the Isa market, which has undergone few alterations since its inception in 1999, amidst discussions from some major firms about limiting tax-free cash holdings. The UK currently offers four main Isa products, with cash Isas being the most favored, accounting for approximately £300 billion in savings. Individuals can save and invest up to £20,000 annually without incurring income or capital gains tax.
It is anticipated that the Treasury’s consultation paper will be released soon, potentially coinciding with Reeves’ Mansion House speech to City executives in July. During this event, the government aims to unveil its Financial Services Growth and Competitiveness Strategy. An insider indicated that the Mansion House initiative focuses on directing more funds into the UK, and any resulting reforms might be included in Reeves’ Autumn Budget.
The Treasury stated that no firm decisions have been made, but they are considering various reform options to balance cash and equity investments. Reeves expressed her desire to create a retail investing culture akin to that in the United States, aiming to improve returns for savers and contribute to economic growth.
In January, the Financial Times reported that some City firms urged Reeves to reduce tax incentives for cash Isas. In March, savers deposited £4.2 billion into cash Isas, marking a nearly 33% increase from the previous year, according to Hargreaves Lansdown.
Companies such as Phoenix and the London Stock Exchange Group informed the chancellor that investing cash Isa funds in stocks could yield better returns for savers while supporting London’s decreasing equities market. Fidelity International has suggested consolidating Isa products and capping the cash component at £4,000.
Despite ongoing speculation, Reeves did not announce changes in the Spring Statement of March. However, the government indicated that it is exploring reform options to balance cash and equities, thereby improving savers’ returns, boosting retail investment culture, and supporting growth objectives.
An industry source mentioned that the consultation could lead to more definitive measures in the Autumn Budget. Tom Selby, from AJ Bell, supported the government’s examination of the Isa system’s effectiveness in promoting a healthy investing culture in the UK. Meanwhile, Carol Knight, from The Investing and Saving Alliance, cautioned against reducing the tax benefits of cash Isas, advocating for better support to help Britons optimize their savings.