Chancellor Rachel Reeves is catching savers in a cruel pincer movement (Image: Getty)
As the Spring Statement looms on March 26, there’s a real danger that Reeves will cut the Cash ISA allowance from £20,000 a year to just £4,000. If she wasn’t considering it, I’d have expected her to have publicly ruled it by now.
City investment managers have been pressing her to force savers to switch money from cash to shares.
And she appears to be listening, telling reporters: “At the moment, there is a £20,000 limit on what you can put into either cash or equities, but we want to get that balance right.”
Nice euphemism that.
Reeves added that she wanted to create “more of a culture in the UK of retail investing like you have in the US, to earn better returns for savers”.
That really does appear to signal her intentions.
And to a degree, I’m down with that. A Stocks and Shares ISA should deliver superior returns over the longer run, albeit with more volatility along the way.
But they’re not for everybody. Especially older savers in their 70s or 80s, who just don’t need the risk.
And they shouldn’t be forced either.
We’ll find out for sure on March 26. But whatever Reeves decides, savers will remain under siege.
The Labour Chancellor is stealthily pushing forward onto two other fronts. Cutting cash ISAs as well would complete a cunning three-pronged attack.
Given that Reeves is a former world grandmaster chess champion, , savers don’t stand a chance.
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The Cash ISA isn’t the only way that people can save tax efficiently. Interest earned from a standard savings account is also tax-free under the Personal Savings Allowance (PSA).
But only up to a point.
Today, basic rate 20% taxpayers can earn £1,000 a year before paying income tax.
For higher rate 40% taxpayers, the PSA falls to £500. It vanishes for those who pay additional rate 45% tax.
These limits have been frozen since the PSA was introduced in April 2016. So they’ve plunged in real terms. Reeves certainly won’t unfreeze them.
Back in 2016, savings rates were close to zero. Today, it’s possible to get 4% or 5%.
More than two million now face a tax bill on their savings interest due to the costly combo of rising and the frozen PSA, AJ Bell says.
Their numbers have tripled in just three years.
And they aren’t all rich. Half will be basic rate taxpayers. Mostly pensioners, who built their savings over a working lifetime.
So that’s the first prong. Now for the second.
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In her Budget in October, Reeves confirmed that the freeze on income tax thresholds will continue until 2028.
That was originally a Tory policy but suits Labour nicely.
As wages and pensions rise, millions will be pushed into higher tax brackets every year due to the freeze. At which point their PSA will shrink.
Someone who is pushed into being a 40% taxpayer will see their PSA cut in half. It falls to nothing if they get shunted into the 45% tax band.
Cutting the Cash ISA is the third and final prong. If Reeves does that, savers will be skewered.
Maybe the Chancellor is cleverer than we think. Or just sneakier.