Slashing cash Isa allowance will do little to help the economy or stock market, HMRC admits

Cutting the cash Isa limit for savers will do little to improve the economy, according to HM Revenue & Customs' own analysis. In its assessment, HMRC said the change, which will be implemented from April 2027, was 'not expected to have a significant macroeconomic impact'.Under the plans, savers under the age of 65 will be able to add a maximum of £12,000 to a cash Isa, down from £20,000 today. Older savers will retain the full allowance. Under-65s will still be able to put the remaining £8,000 into a stocks and shares Isa. The decision to curb the amount of money people can add to cash Isas was made by former chancellor Rachel Reeves, in a bid to boost the economy by encouraging investment. Changes: From April 2027, under-65s will see their cash Isa allowance cut to £12,000 per year How much will the changes cost the government? In its assessment, HMRC did not state how much money was expected to move from cash into investments. However, it said that the reform would have a 'significant' impact on Isa managers such as banks and investment platforms, who would incur one-off costs from updating systems, processes and customer communications.It estimated that one-off business costs to implement all the changes needed could reach around £6million. The final costing of the policy is also yet to be examined by the Office for Budget Responsibility. HMRC said that in 2022 to 2023, 78 per cent of cash Isa subscribers aged under 65 subscribed less than £12,000 to a cash Isa and 22 per cent added more than £12,000.It added: 'Following the introduction of the revised limits, those individuals who are affected may need to adjust how they allocate funds between cash Isas and non-cash ISAs and the type of investments they hold in a stocks and shares Isa.'The measure is not expected to impact on family formation, stability or breakdown.'HMRC said individuals aged between 55 and 64 and those aged 65 years or older 'are estimated to be overrepresented in the population subscribing to a cash (18 per cent and 34 per cent respectively), compared to their prevalence in the UK adult population (17 per cent and 24 per cent, respectively).'HMRC also said it would need to alter its own tech systems to handle the Isa allowance changes, at a cost of about £200,000. Investment returns typically beat those available via cash savings in the long-term, but there is more risk involved with investing than there is sticking with cash Isas or cash savings accounts. The reforms will also introduce measures designed to stop savers from getting around the lower cash limit by holding large cash balances within stocks and shares Isas.From April 2027, interest earned on cash held in investment Isas will be subject to a flat-rate tax charge. Investors will be charged 22 per cent tax on any interest they make on cash held in a non-cash ISA.Money market funds, which pool investor money to buy cash-like securities, will also face new rules, while transfers from stocks and shares and Innovative Finance Isas into cash Isas will be restricted for people under the age of 65. Critics claim the changes will make the system more complicated and hit people on lower incomes or who are vulnerable and prefer to stick with cash Isas. The Treasury said: 'We are reforming the cash Isa to encourage more people to invest in stocks and shares, which have historically performed better than cash savings, and we have retained the generous £20,000 tax-free limit.'These changes will make people better off and will not require anyone to move savings from their cash Isa. 'The vast majority of savers will continue to pay no tax on their savings and the Treasury and HMRC are working at pace with industry on the detailed rules and will update on next steps in due course.'Protect Your Money – sign-up to our six-week plan The Budget is coming – but are you prepared? Sign up to our six-week plan and Simon Lambert and his team of financial experts will reveal how to Protect Your Money. If you're a subscriber, it's completely FREE > Sign-up to Protect Your Money SAVE MONEY, MAKE MONEYUp to £250 cashbackUp to £250 cashback2.5% cashback when investing at least £2004.75% cash Isa4.75% cash IsaTrading 212: 1.15% fixed 12-month bonus£3,000 cashback£3,000 cashback£100-£3,000 cashback when opening SippUp to £150 cashbackUp to £150 cashbackOpen a savings account with at least £5,000Welcome bonusWelcome bonusGet up to £200 when you invest £100Affiliate links: If you take out a product This is Money may earn a commission. These deals are chosen by our editorial team, as we think they are worth highlighting. This does not affect our editorial independence. Terms and conditions apply on all offers.