Is Rachel Reeves preparing to introduce the most significant overhaul to tax-free Isas in a quarter-century during her upcoming Budget announcement?

Recent reports suggest that savers might experience a reduction in their annual cash allowance and could be required to invest a specific portion in UK companies. However, there is a silver lining, as these changes might also include two new tax incentives for investors.

But what exactly might these changes entail, and how can savers prepare to safeguard their interests?

There is speculation that the concept of a British Isa could be making a comeback. This idea, originally proposed during the Conservative government, would offer investors an additional tax-free Isa allowance of £5,000, supplementing the current £20,000 limit.

British Isa returns

Plans for a so-called British Isa could be revived, according to reports.

The British Isa was an idea previously put forward when the Conservatives were in power, which would allow investors an additional £5,000 tax-free Isa allowance on top of their existing £20,000 allowance. 

However, savers could only use it to invest in UK-listed companies.

Budget rumours: Chancellor Rachel Reeves (pictured) is reportedly considering launching a British Isa or introducing other measures to boost investment in UK companies

Proposals were scrapped by the Labour Government on the grounds that it would over-complicate Isas.

Now, as the Treasury looks for ways to boost investment in the UK, the idea is back on the table – at least in some form.

However, some financial experts fear UK investors already have a high proportion of their savings in UK-listed companies.

If they are incentivised to put even more in UK stocks, they may end up too heavily reliant on one specific stock market – which can put them at risk if shares fall.

Between 40 and 50 per cent of Isa assets are already invested in UK firms or UK-focused funds, according to stockbroker AJ Bell. By comparison, the UK makes up only around 4 per cent of the global stock market.

Tom Selby, director of public policy at AJ Bell, says: ‘The [British Isa] proposal risks causing more harm than good over the long term by creating extra complexity for Isa investors.

‘As investors tend to naturally favour UK investments anyway, it would be much simpler to increase the overall Isa allowance to £25,000, a move which would likely achieve similar results to a British Isa but without the extra complexity.’

Forced to hold stock in UK firms

HM Treasury is said to be weighing up whether savers should be forced to hold a minimum amount of UK company shares or funds in their Isas.

It is not yet known what the minimum holding in UK equities would be, but it is thought that City figures are pushing for a minimum allocation of 25 to 50 per cent.

This would be a restriction on the existing Isa allowance, rather than the British Isa model, that creates a new allowance specifically for UK investments. 

It would amount to around £5,000 to £10,000 of the current £20,000 Isa allowance allocated to UK companies, if it went ahead.

Emma Wall, chief investment strategist at stockbroker Hargreaves Lansdown, says: ‘We think that there are better ways to promote retail investment than a UK mandate such as this.

‘We find among our clients the majority of trades are into UK shares already.’

Mr Selby, at AJ Bell, adds that forcing savers to hold UK investments within Isas would be a ‘naked political gimmick’. ‘It would add huge complexity to the system with no obvious benefit to investors or the economy,’ he says.

Axing stamp duty on London shares

Investors currently pay tax when they buy shares electronically. This so-called stamp duty reserve tax (SDRT) costs 0.5 per cent of the price you pay for the shares.

Financial institutions have met Treasury officials to discuss removing the stamp duty tax from London-listed stocks held in Isas.

Mr Selby says getting rid of the tax would ‘remove a nonsensical barrier to Isa investors buying shares in UK businesses’.

‘Stamp duty is a tax that explicitly disincentivises investment in British companies at a time when Government policy is aimed at doing precisely the opposite,’ he adds.

Savers hit: The Chancellor is considering cutting the cash Isa allowance to £10,000 from its current £20,000 level, according to reports

AJ Bell estimates getting rid of stamp duty on the purchase of electronic shares would cost the Government around £120million – a fraction of the cost of getting rid of stamp duty on homes.

Inigo Esteve, a partner in the White & Case Capital Markets group, said the move could enhance London’s competitiveness.

He says: ‘This could give further impetus to London’s capital markets and help reassert its position as Europe’s largest and pre-eminent listing venue.’

Not only would investors have a reduced tax bill when buying shares in UK firms, but companies may also be encouraged to list here if it is cheaper for investtors to buy their shares.

Cut allowance on cash isas to £10k

The Chancellor is considering cutting the cash Isa allowance to £10,000 from its current £20,000 level, according to reports.

Ms Reeves was tipped to announce plans to slash the £20,000 tax-free allowance to as little as £4,000 in her Mansion House speech in July.

But these plans were put on hold after a furious backlash, led by Money Mail’s Hands Off Our Cash Isas campaign, and warnings from building societies.

Building societies said they use savings held in cash Isas to fund mortgages, and restricting inflows would potentially drive up the inherent rates they charge borrowers.

Andrew Gall, head of savings at the Building Societies Association, says: ‘Cutting

the cash Isa allowance will undermine a brilliant savings product that is helping people to build a savings habit and their own financial resilience.’

The Chancellor is considering cutting cash Isas to encourage savers to put money into stocks and shares. 

However, financial experts warn it will have no such effect and savers will simply put their money into ordinary accounts where they could face a tax bill. 

This could considerably boost the £6billion the Treasury rakes in from tax on savings interest each year.

Savers who are considering opening a cash Isa would be wise to do so now and to use as much of the full £20,000 allowance as they can.

Jason Hollands, a director of wealth manager Evelyn Partners says: ‘There really is no reason not to use your Isa allowance if you have some cash to put away.’

Money Mail contacted the Treasury for comment.

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