Cash ISA cuts: Is Rachel Reeves targeting savers to fix the economy?

Chancellor Rachel Reeves is expected to use her upcoming Mansion House speech on 15 July to unveil a controversial cut to the annual cash ISA allowance, a move that has been rumoured for months but repeatedly delayed. While positioned by the Treasury as a push to “encourage investment”, many financial professionals are unconvinced.

At present, individuals can save up to £20,000 each tax year in ISAs, choosing between cash and stocks & shares options (or splitting between both). The appeal of ISAs lies in their tax-free status: interest or investment gains are not subject to income or capital gains tax.

But amid a cost-of-living crisis and stubbornly high inflation, the idea of reducing the amount people can shelter from tax has raised eyebrows.

To add to this, the government’s messaging on the issue has been inconsistent. In May, Reeves suggested that too much money was “sitting idle” in cash accounts, depriving British businesses of investment capital. Yet earlier this week, MPs criticised Lifetime ISAs for failing to deliver on their intended role as long-term savings vehicles, describing them as underperforming compared with pensions. The contrast in tone leaves a lack of clarity about what the government truly wants from savers.

To many observers, it appears that the Chancellor has identified the rising interest earned on cash ISAs – a result of higher interest rates – as a potential revenue source. With limited options left to raise funds through spending cuts or other tax changes, trimming ISA allowances could allow the Treasury to collect tax on a portion of that interest income.

This raises concerns about fairness. Cutting the allowance risks penalising people who are doing what most financial guidance would consider responsible: saving steadily, building a financial cushion, and planning ahead.

There’s also concern about the pressure this puts on people to invest instead of save. While it's true that investments typically outperform cash over the long term, that performance is not guaranteed, and short-term losses can be unsettling, particularly in volatile markets.

I experienced this personally when I opened both cash and stocks & shares Junior ISAs for my daughter. I had never invested before, always preferring the reliability and flexibility of cash ISAs, but I was encouraged to invest for my daughter by a financial expert.

Initially, the investment account slightly outperformed the cash one, and I considered directing more of my monthly contributions toward it. But when global events rattled the markets - in this case, new US tariffs announced by Donald Trump - the value dropped by 12%. I remember the shock of logging in and realising the account held less than I had paid in. It felt like I had gambled with my daughter’s future.

Although the value has since recovered and is now up nearly 10%, that early loss made me cautious. Her Junior ISA can’t be accessed until she’s 18, so there’s time for it to grow. But if I’d needed that money sooner, I wouldn’t have had that problem with a cash ISA.

In an uncertain economy, where people are still grappling with rising costs and financial insecurity, it seems misguided to push them towards investment by making cash saving less attractive. If the government genuinely wants to support investment, it could offer new incentives instead of reducing the benefits of saving.

If this were truly about helping businesses or encouraging economic growth, it might be easier to accept. But to many savers, it feels more like a backdoor tax and a short-term fix at the expense of long-term financial confidence.