Savers are set to lose a chunk of their tax-free cash individual savings account allowance as the Treasury prepares to take an axe to the £20,000 limit.
Chancellor Rachel Reeves poised to cave into lobbying by City firms in a move that could affect millions of people who use Isas.
Individuals can currently put £20,000 a year into the tax-free vehicles, choosing how to split the limit between cash accounts and shares.
However, critics insist the volume of cash savings is holding the stock market back, arguing that the Treasury’s £7billion a year tax break should be targeted to encourage investment.
Ms Reeves has been scrambling to find ways of boosting growth, in the hope that it can help her balance the government’s books.
Some 12.4 million adults hold cash accounts to shield their nest egg from the taxman.
Trading platform IG has called for the cash wrapper to be ‘scrapped altogether.’
In May Ms Reeves confirmed the overall £20,000 limit would remain in place.
But she stopped short of stating the amount that can be kept in cash will also stay at this level. The Treasury repeated this when approached for comment.
Ms Reeves said: ‘It’s really important that we support people to save, to achieve their aspirations.
‘I’m not going to reduce the £20,000 Isa limit but I do want people to get better returns on their savings, whether that’s in a pension or in their day-to-day savings.’
The Government wants to reform the Isa system to encourage more people to plough money into the stock market to bolster the UK’s lacklustre retail investing culture.
It is hoped the move will spark more investment into London-listed stocks, which will support the Government’s growth agenda.
Insiders say the Treasury previously discussed cutting the cash Isa allowance to as low as £5,000 but it is understood they are still considering the threshold.
The Building Societies Association warned earlier this year that savers rely on the tax wrappers to achieve their savings goals but also claimed any curtailment could lead to a mortgage shortage and a hike to borrowing costs.
In response to the Mail’s Hands Off Our Cash Isa campaign, many readers said they shouldn’t be penalised for preferring safe cash savings over risky stock holdings.
The Exchequer will rake more money into its coffers if savers breach their Personal Savings Allowance rather than investing.
The apparent move by Ms Reeves comes amid a bleak backdrop for the public finances.
Fears are mounting that the Chancellor will have to hike taxes again to fill a burgeoning black hole in the government’s spending plans.
The situation has been worsened by Keir Starmer’s humiliating U-turns on winter fuel and health and disability benefits.
Those two changes alone could leave the Treasury having to find another £4billion a year by the end of the Parliament, while pressure is ramping up for more spending on defence.
Ms Reeves was handed some much-needed relief yesterday as the economy was confirmed as growing 0.7 per cent in the first quarter.
Official figures showed the powerhouse services sector expanding by 0.7 per cent between January and March.
Production was also up 1.3 per cent over the three months, although construction recorded a mediocre 0.3 per cent improvement. Overall the expansion was the best in a year.
However, economists have been warning that a slowdown is already happening after the impact of Labour’s huge tax raid on businesses and Donald Trump’s trade war. GDP fell by 0.3 per cent in April.