Rachel Reeves floats ISA overhaul ‘idea’ as tax-free savings allowance could be CUT from £20k to £4k
Chancellor Rachel Reeves is understood to be considering drastic cuts to the cash ISA tax-free allowance, potentially slashing the current £20,000 limit to just £4,000 annually.
The potential reform follows meetings between the Chancellor and senior City executives at 11 Downing Street, where fund managers pushed for changes to encourage more investment from UK savers.
Treasury officials told the Financial Times the Chancellor was “listening to ideas” about simplifying tax-free savings, in a move that could fundamentally reshape how millions of Britons save their money. The Wednesday meeting at Number 11 focused on economic growth and ways to boost investment from UK savers.
City executives proposed simplifying the tax-free savings system, with Fidelity International, which manages £710billion in assets, calling for the ISA regime to be consolidated into a single type.
“It was a good conversation with a lot of focus on how to make little adjustments to further stimulate the equities market and create more of an investment culture,” one City source told The Telegraph.
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Rachel Reeves is reportedly understood to be considering changes to ISA allowances
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Fund managers argue that cash options currently discourage savers from investing in British growth. Under current rules, savers can open multiple ISAs each year with a combined tax-free allowance of £20,000.
There are four main types of ISAs available to British savers: cash, stocks and shares, innovative finance and lifetime. All of these options allow for tax-free savings on returns, regardless of how the money is invested.
Savings experts warn that the push to encourage savers into stocks and shares ISAs could signal the end of the cash ISA, as City executives advocate for limiting cash options.
A record £49.8billion was deposited into cash ISAs in 2024, according to Bank of England data, surpassing the previous record of £47.1billion set in 2023.
The six per cent increase came as savers sought to capitalise on rising interest rates. Following reports in January that Reeves was considering changes to cash ISAs, there has been a significant rush to open new accounts.
Hargreaves Lansdown reported that 56 per cent of accounts opened between the news breaking and February 12 were cash ISAs. Payments into cash ISAs are up 325 per cent in 2025 compared to last year, according to the savings platform.
Payments into cash ISAs are up 325 per cent in 2025 compared to last year, according to the savings platform. Between January’s reports of potential changes and February 12, more than half of all accounts opened with Hargreaves Lansdown were cash ISAs.
Basic-rate taxpayers with £50,000 in savings at 4.85 per cent interest save an extra £292 through the tax-free ISA wrapper. Higher-rate taxpayers benefit even more, with tax savings of £792 on the same amount.
Additional-rate taxpayers see the greatest advantage, saving £1,116 as they would otherwise pay 45 per cent tax on the full £2,480 of interest earned. The proposed changes could significantly impact these tax advantages, particularly affecting those who have built up substantial savings in cash ISAs.
Analysis by wealth management firm Quilter shows pensioners could be particularly hard hit by the proposed changes. Higher-rate taxpaying pensioners, who typically prefer a more cautious approach with their savings, could lose up to £4,680 over the next five years.
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Savers are worried tax-free allowances could be slashed
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This calculation is based on a relatively modest pot of £42,423, highlighting how the impact could be significant even for those with moderate savings. The potential losses reflect pensioners’ traditional preference for cash savings over riskier investments.
James Carter, head of platform product policy at Fidelity International, called for a complete review of the ISA system. “The entire UK Isa regime should be reviewed with the aim of simplifying it for consumers. This should include consolidating the different types of Isa into one product,” he said.
Economic secretary Emma Reynolds expressed concern about current savings patterns in a House of Lords committee meeting. “Why have we got hundreds of billions of pounds in cash Isas? We have failed to drive an investment culture,” she told the committee.
Reeves said: “I am determined to go further and faster to drive growth and put more money into peoples pockets through our Plan for Change.” However, sources from building societies, which are major providers of cash ISAs, told The Telegraph they don’t expect significant changes to the current scheme.
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