With just over a month until the Autumn Budget, tax and ISA allowance rumours are swirling — will Reeves cut the Cash ISA allowance and revive the British ISA? Here’s what savers and investors need to know.
The Autumn Budget is now just over a month away and the rumours are swirling, from potential tax tweaks to ISA allowance slashes.
The chancellor Rachel Reeves is under pressure to fill a supposed £22 billion hole in public finances, while making sure that the economy doesn’t take too big a hit.
Reeves has already admitted that tax rises and spending cuts could well be on the cards for the Autumn Budget. And now attention is turning to ISA reforms.
Will Rachel Reeves cut the Cash ISA allowance?
The chancellor has made it clear that she wants to get Brits investing in British companies and help boost the attractiveness of the UK stock market.
One way she might try to do that is by cutting the Cash ISA allowance from £20,000 to just £10,000.
Reeves has confirmed that she plans to keep the overall ISA allowance at £20,000. So the idea would be that, by only being able to keep half of this allowance in a Cash ISA, savers would be incentivised to invest more of their overall ISA allowance in the stock market instead — using a Stocks and Shares ISA.
A Cash ISA allowance cut was floated earlier in the year, in the run up to the Spring Statement. It was then reigned back in after big building societies pushed back.
They argued that a large number of these investors are using Cash ISAs for house deposits, so any change could be a headwind for first-time buyers.
Since then, Reeves’ team have recently confirmed that a Cash ISA allowance cut is being considered again.
However, they’ve also said that this is just one option among many being discussed.
Is cutting the Cash ISA allowance a good idea?
InvestEngine’s Head of Investments, Andrew Prosser, says:
The groups most likely to use cash ISAs – those aged 25–34 and over 65 – typically rely on them for very different reasons.
Younger savers often use cash to build deposits for things like a first home, while older savers use them to manage short-term spending needs.
Neither group is likely to want exposure to market risk, so reducing the cash limit wouldn’t suddenly push them toward investing their money.
Instead, it’s likely many would simply hold the same amount of cash outside the ISA wrapper, meaning more of their interest could be taxed.
The result could be that UK savers end up worse off, not more invested.
If the government wants to boost investment participation, it should focus on making investing simpler and more accessible, while encouraging better financial education instead of penalising those who prefer to keep their money in cash.
Money market ETFs — a good alternative to Cash ISAs?
If you’re worried that the Cash ISA allowance could be cut and still want a lower-risk option for your ISA, you could consider money market ETFs.
Money market ETFs typically invest in ultra short‑term government debt and other fixed income investments backed by excellent credit ratings. In short, they can provide a lower-risk option while still earning a decent return on your money.
The current targeted return for these funds is 3.97%, in line with the Bank of England’s overnight interest rate benchmark.
Will Reeves revive the British ISA in the Autumn Budget?
With clear plans to get more Brits investing in British companies, it’s perhaps no surprise to see the resurgence of rumours around the British ISA.
Like the Cash ISA rumours, the British ISA was first floated earlier this year. It too was stopped in its tracks out of fear it would make the overall ISA picture more complicated.
Rumours suggest the British ISA would give investors an extra £5,000 tax-free allowance to invest in the UK stock market.
While Treasury officials are weighing up the addition to the overall ISA allowance, like the Cash ISA allowance cut, for now it’s still just one option among many.
What does all this mean for savers and investors?
With such a big black hole in public finances, there’s no doubting Reeves is under pressure.
And for savers and investors that could well mean that we see ISA changes, alongside potential tax tweaks.
If you still have unused ISA allowance and you’re worried about ISA tweaks, then now could be a good time to think about using it, for example by topping up your Stocks and Shares ISA.
However, Rachel Reeves hasn’t confirmed any changes yet and very likely won’t until the Autumn Budget on 26 November. So, it’s important to avoid any knee-jerk reactions and, if you do make any decisions, just make sure it fits in with your long-term financial plan.
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