Revising the maximum amount that can be invested in a cash individual savings account (ISA) or abolishing them could make mortgages more expensive and negatively impact mutuals, Leeds Building Society’s chief executive Richard Fearon (pictured) says.
ISAs allow individuals to save up to £20,000 each tax year, either in one or spread across several accounts, and come in four types – a cash ISA, stocks and shares ISA, innovative finance ISA and Lifetime ISA.
ISA account holders do not pay tax on interest on cash in an ISA or income or capital gains from investments in an ISA.
The latest government figures suggest that around 7.86 million cash ISA accounts were subscribed to in 2022-23, making up nearly two-thirds of adult ISA accounts.
The total amount subscribed is around £41.6bn for the period. The average subscription amount is estimated at £5,296.
Reports have suggested that Chancellor Rachel Reeves and the Treasury are considering lowering the maximum amount you can save in a cash ISA, with some suggesting that the maximum limit be capped at £4,000 per tax year. Another option rumoured to be considered is scrapping cash ISAs completely.
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The reasoning is to “create more of a culture in the UK of retail investing” and encourage more people to invest in equities to support investment in UK companies, according to Reeves.
Fearon said that while there is some “merit in this argument”, there were “counterpoints” that need to be considered and “appear to be absent from the debate”.
One factor is a lack of demand from savers, with Fearon pointing to the fact that only 7% of members want to open a stocks and shares ISA in 2025.
“The vast majority of them are fully aware of the potential upside of investments, but are making a conscious choice to ensure their capital is protected,” Fearon said.
He also pointed to the fact that “investments will not be suitable for everyone”, as there would be circumstances where people should not risk savings on short-term share price movements. Examples could be those looking to buy a home in two or three years’ time or pensioners.
Removing the “tax-free wrapper” will also up costs for the average saver, with Fearon explaining that if cash ISA savers moved their money into non-ISA cash accounts rather than a stocks and shares ISA, then those with a typical balance could face an additional tax burden of £750 per year.
“It’s naïve at best, or misinformation at worst, to say money saved in cash ISAs is dormant – we, and all building societies, use it to fuel our mortgage lending. If you reduce that funding, mortgages would become more expensive for borrowers. The last thing families and aspirational homeowners need is to have greater pressure on their mortgage bills when millions are already facing cost-of-living pressures,” he said.
Fearon noted that “arguments in favour of growth in some sectors” need to “consider the wider picture” and “increased stocks and shares funding may not even be invested in UK companies”.
He noted that, given the “relative performance” and disincentive from stamp duty, investors may choose to invest in other markets through things like US equity trackers.
“Meanwhile this will come at the cost of impacting the UK mortgage and housing market when the government is rightly aiming to create 1.5m more homes, which will require affordable mortgages.
“This would be bad for mutuals and the diversity of the UK’s financial services sector – before the election, Labour’s growth plan committed it to doubling the mutual sector and creating a level playing field within financial services. A change of this nature would drive in precisely the opposite direction, given that mutual building societies account for about 40% of the cash ISA market.
“We will continue to speak up on behalf of our members and savers who would be impacted by this. We support growth and we believe in changing the status quo when it drives better outcomes. But we also believe in the mutual model, consumer choice and fairness. The proposals for changing cash ISA rules do not deliver on any of those,” he concluded.
