Reeves’s plan to cut cash Isa limit could raise mortgage rates, say finance bosses

Rachel Reeves’s plan to slash the annual cash Isa limit by 40% could lead to higher mortgage rates and deter consumers from saving, finance bosses have said. The chancellor is expected to cut the maximum amount people can put into tax-efficient cash individual savings accounts from £20,000 a year to £12,000 in Wednesday’s budget. The Treasury has been examining the limit this year, sparking a fierce debate over whether it should scale back tax breaks on the popular savings accounts to encourage a shift from cash into stock market-based investments – in particular, British companies. Reeves has talked about striking a “balance” between the amounts people can put into cash or shares, and wanting to create “more of a culture in the UK of retail investing like you have in the US”. However, cash Isas are a key source of funding for banks and building societies, which use the deposits to fund loans to households and businesses. Nationwide building society has said that cutting tax breaks on the accounts would reduce the availability of mortgages for first-time buyers. Earlier this year it was rumoured that Reeves could cut the limit to as low as £4,000, but on Monday the Financial Times said she would opt to reduce it to £12,000. She will hope to deflect criticism by expanding eligibility for a separate government-backed scheme called help to save, which gives people on low incomes a bonus of 50p for every £1 they save over four years. The scheme will be expanded to an additional 1.5 million savers, including many carers and parents on universal credit, and made permanent. It had been set to end in 2027. The latest official figures show a rise in demand for cash Isas, with almost 10m of them taken out in the 2023-24 tax year and a record £103bn put into the accounts. Robin Fieth, the chief executive of the trade body the Building Societies Association, said: “We are disappointed that the cash Isa subscription limit is to be lowered. A cut to £12,000 will not encourage more people to invest but will add unnecessary complexity, particularly around Isa transfers, and risks damaging the overall Isa brand. This may also deter people from saving and investing.” Tim Bowen, a former chief executive of Penrith building society, said cutting the limit to £12,000 “would not just be a backward step for UK savers but the whole building society ecosystem”. Bowen, now chief executive of the financial technology company Mutual Vision, added: “Less money being saved means there will be less to lend, which is bad news for borrowers and the property market as a whole.” Building societies in particular rely on cash deposits to fund the loans that keep key parts of the market moving, such as shared ownership mortgages and deals for those whose finances are more complex or who have adverse credit histories. Craig Fish, the director of the broker firm Lodestone Mortgages, said: “Slash cash Isa allowances and you reduce the very savings pots these lenders depend on. Less money in means less money out, and that can only lead one way: tighter lending and potentially higher rates.” “This risks choking off competition and putting pressure on already sensitive parts of the property market,” he added. However, Greg Davies of the behavioural finance specialist Oxford Risk said: “Recent speculation about restricting cash Isa allowances misses a more fundamental problem: that these products are behaviourally flawed to begin with. “By combining emotional comfort with a tax benefit, people are rewarded for holding on to cash, even when investing that money would serve their long-term needs more effectively. “The average investor loses 2-3% annually from holding too much cash. This isn’t a knowledge problem; it’s an emotional unwillingness to move from what feels safe to what’s suitable.” It is not known how many people would be directly affected by a cut in the limit to £12,000, but a survey from Yorkshire building society published on Monday claimed that almost half of the cash Isa holders polled said any reduction to the £20,000 allowance “would impact them moderately or severely”. Some experts have cast doubt on the idea that cutting the cash Isa allowance would prompt more people to invest their cash in the stock market. Rachael Griffin, a tax and financial planning expert at the wealth management firm Quilter, said: “If a cap does come in, it is unlikely to send money rushing into stocks and shares Isas. Instead, we could see more flowing into premium bonds or other perceived safe options.”