Building societies have warned the Government risks derailing its own housing targets if Chancellor Rachel Reeves cuts cash ISA limits in the upcoming Budget. The Financial Times reported that Reeves is examining plans to overhaul tax-free ISAs to foster an investment culture, with the Treasury considering slashing the annual cash ISA allowance from £20,000 to £10,000.
A person close to the process indicated several options remain under consideration and no final decisions have been made. More than 14 million people in the UK are believed to have over £10,000 saved in cash, with the Government hoping some could be redirected into stock market investments to improve financial health.
Mortgage funding concerns
Building societies, which fund over a third of all first-time buyer mortgages, depend heavily on retail deposits including cash ISAs for their lending operations. Charlotte Harrison, chief executive of home financing at Skipton Group, warned that reduced ISA inflows could increase funding costs and make mortgages both more expensive and harder to access.
"That risks derailing the Government's own target of building 1.5 million homes, a goal that depends on buyers being able to secure affordable mortgage finance," Harrison said. She added that Skipton backs getting more people to invest, "but not by penalising savers who want low-risk, flexible options".
Harrison called for "a Government-supported, industry-led campaign to boost financial awareness, helping people make confident choices about when to save and when to invest". Skipton has raised concerns directly with Ministers and will continue pushing for a balanced approach protecting savers whilst supporting home ownership.
Industry divided on reforms
Jeremy Cox, head of strategy at Coventry Building Society, emphasised that ISA simplicity remains one of its greatest strengths. "Savers can put in up to £20,000 every year, switch between the stock market or cash, or have a mix of the two," Cox said, warning the Chancellor must avoid discouraging cash savings whilst nudging people toward investing.
Brian Byrnes, head of personal finance at Moneybox, called the proposal "a clear case of the right diagnosis but the wrong prescription". He warned that reducing cash ISA allowances could risk undermining consumer confidence rather than building the investment culture the Government seeks.
Some experts support the reforms. Tom Selby, director of public policy at AJ Bell, said the Chancellor is "absolutely right to challenge the status quo on Isas", calling for reforms that make long-term investing easier for those with excess cash.
Strong support for changes
Michael Healy, UK managing director at IG, argued cash ISAs "are completely incompatible with long-term wealth creation". He said the Chancellor should go further by "abolishing the cash Isa allowance altogether", describing it as an outdated product.
Denis Cornwall, direct channel manager at Wesleyan, welcomed steps to encourage stronger retail investing culture if they improve financial wellbeing. He emphasised that investments must align with personal goals and risk tolerance, especially for first-time stock market investors.
Alternative approach suggested
Andrew Prosser, head of investments at InvestEngine, warned the proposed cuts could backfire by penalising legitimate cash savers. He noted younger savers often use cash to build deposits for first homes, while older savers manage short-term spending needs - neither group likely wanting market risk exposure.
"Instead, many would simply hold the same amount of cash outside the Isa wrapper, meaning more of their interest could be taxed," Prosser said. He argued this could leave UK savers worse off rather than more invested.
Prosser suggested the Government should focus on making investing simpler and more accessible through better financial education. "If the Government genuinely 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," he said.
Government response
The Financial Conduct Authority has outlined plans to reduce the "advice gap" with proposals enabling firms to offer "targeted support" and suggestions to consumer groups with common characteristics. A Treasury spokesperson said cash savings remain important for rainy day funds, but the Chancellor wants to "get Britain investing again" so companies can grow and savers can get better returns.
Sources used: "PA Media", "Financial Times" Note: This article has been edited with the help of Artificial Intelligence.
