The UK government is reportedly considering a significant reduction in the tax-free allowance for Cash ISAs, which could have a major impact on millions of savers. The proposed cut would lower the annual limit from £20,000 to £4,000, potentially increasing tax liabilities on interest earned.
This change has sparked widespread concern, with critics warning that it could cost households thousands of pounds in additional taxes. Financial experts and industry groups have raised alarms about the potential economic consequences, particularly for middle-income savers who rely on ISAs to shield their savings from taxation.
Proposal Could Lead To Increased Tax Costs for Savers
The proposal, which is reportedly under consideration by Chancellor Rachel Reeves, could lead to a substantial increase in the tax burden for those who regularly deposit into Cash ISAs.
According to research commissioned by the Scottish National Party (SNP), a saver making annual deposits of £16,000 at a 5% interest rate over five years could face a tax loss of up to £5,132.
According to the House of Commons Library, around 25% of Scottish adults currently have a Cash ISA, collectively holding £52.7 billion in savings. The potential changes have raised concerns that reducing the tax-free threshold could discourage savings and push people towards riskier investment products.
Financial expert Martin Lewis has already voiced his concerns, while building societies report being “inundated” with worried customers seeking clarification on their savings plans. Additionally, some speculation suggests that the government may even consider scrapping the tax-free allowance entirely, which could further alter the UK’s savings landscape.
Calls for Government to Reconsider Policy Shift
Criticism of the proposed policy shift has been widespread, particularly from the SNP and financial analysts who argue it could disproportionately impact working families and middle-income savers.
Dave Doogan, the SNP’s economy spokesman, described the potential changes as a “punishing new tax on savers” and called on the government to abandon the plan.
According to Doogan, the UK already lags behind other European nations in savings rates, with household savings in the UK at just 2% of disposable income, compared to more than 10% in France, Germany, and the Netherlands.
He warned that cutting the ISA allowance could further discourage financial security at a time when the cost of living crisis is affecting millions.
