Reeves is warned against targeting Isas

Rachel Reeves has been warned that tapping record deposits in Isa accounts by curbing tax reliefs risks suppressing much-needed investment.
Analysis of data published by the Bank of England showed that savers hold £375 billion in individual savings accounts, the highest level since the product was launched in 1999.
In the past year alone Isa deposits have climbed 17 per cent, or £54 billion, from £321 billion, with monthly inflows reaching a record of £11.7 billion in April partly due to the tax year deadline falling in the month.
After accounting for inflation, which rose to a high of 11.1 per cent in 2022, the real terms value of Isa deposits is lower.
The swelling of Isa deposits to record levels could be seen by the chancellor as an opportunity to raise tax revenue in the budget on October 30 by lowering the annual tax-free allowance, which stands at £20,000.
Ashley Webb, UK economist at Capital Economics, a consultancy, said: “While reducing the tax-free allowance on Isas would raise revenue for the Treasury, it won’t help lift the UK’s low level of investment.
“Investment in the UK is five percentage points of GDP lower than in other G7 economies, and part of that is due to the UK’s low saving rate.”
Tomasz Wieladek, chief European economist at T Rowe Price, the investment firm, said: “The UK doesn’t save enough as a country. That is one of the reasons behind weak investment. Given their historical low propensity to save, British savers need all the incentives to save they can get.”
Isas are savings accounts that provide users with tax reliefs. There are several iterations of these products, with the most common vehicles being cash Isas and stocks-and-shares Isas, the latter of which allow people to invest in financial securities.
Monthly inflows into these tax-saving accounts have surged this year, in part due to the Bank of England having increased interest rates to a 16-year high of 5.25 per cent.
Philip Shaw, chief UK economist at Investec, the investment firm, said: “The most obvious reason why [deposits have jumped] is that interest rates have risen materially above zero.”
Webb agreed, noting that elevated interest rates had “provided households with a greater incentive to make use of the annual Isa allowance”.
General saving rates across the economy have increased sharply since the Covid-19 crisis, with the Office for National Statistics estimating that households set aside about 10p in every £1, up from about 5p before the pandemic. Goldman Sachs, the US investment bank, said greater propensity to save may be driven by “scarring effects from the pandemic”.
Data from the Bank of England also showed that over £1 trillion is sitting in savings accounts with an interest rate of around 2 per cent, well below the base rate of 5 per cent.
The tax-free Isa contribution cap has only ever been increased, with the intention of motivating people to save and invest. Reeves, however, could limit these reliefs, which cost £6.7 billion last year, according to the Resolution Foundation, an economic think tank.
Its researchers have previously suggested imposing a lifetime tax-free cap of £100,000 on Isas to generate revenue to be spent on the government’s Help to Save initiative, a policy designed to encourage low incomes families to save more.
Reeves has ditched the previous Conservative government’s plans for a “British Isa”, an investment vehicle designed to channel capital into UK stocks.
The Treasury said: “We do not comment on speculation around tax changes outside of fiscal events.”