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UK building societies have called on Rachel Reeves to resist lobbying by big City of London firms to curb tax breaks for cash Isas, warning that any changes to the highly popular form of saving could have wider negative consequences.
In a letter seen by the Financial Times, the Building Societies Association told the chancellor it “strongly” disagreed with the proposal to scrap the cash Isa, which allows savers to earn tax-free interest on up to £20,000 a year.
Companies including insurance group Phoenix and data provider the London Stock Exchange Group last month told Reeves that almost £300bn held in cash Isas could generate better returns for savers if invested in stocks and shares, while supporting the City’s dwindling equities market.
But in the letter sent last week, BSA chief executive Robin Fieth warned that lowering the tax incentives around cash savings, which are used by building societies to fund loans, could make mortgages more expensive for consumers.
“Cash Isas help consumers to achieve their savings goals . . . They represent a policy success upon which we should seek to build, rather than to curb,” added Fieth, whose group represents all 42 of the UK’s building societies.
Cash Isas were launched in 1999 by then Labour chancellor Gordon Brown as a means of encouraging Britons to save. Almost half are held by people with an annual salary of less than £20,000, and the average savings balance is just under £13,400, according to tax authority HM Revenue & Customs.
City firms pushing for Reeves to lower tax incentives on cash Isas hope that funnelling more money into stocks and shares will stimulate economic growth and boost the UK’s capital markets.
Banks earn fees by helping companies sell shares to retail and institutional investors, while asset managers have suffered in recent years from investors pulling money from their UK equity funds.
Data from HMRC shows £431bn was held in stocks and shares Isas in 2022-23, compared with £294bn in cash Isas.
“The implication made by many of those calling for curbs on cash Isas is that the savings are lying idle and not supporting economic growth,” said Fieth in the letter. “But banks, building societies, credit unions and other providers use the deposits to fund loans to households and businesses.”
“Substantially reducing the role of cash ISAs would have knock-on impacts on the price and availability of these loans if providers had to replace the funds from other sources,” he added.
Building societies are a type of mutual lender founded in the late 18th century, and unlike banks are owned by their customers rather than shareholders.
Building societies are more reliant on savings and deposits as a source of funding for loans than traditional high-street banks because of restrictions enshrined in the Buildings Societies Act.
Before winning power last year, Labour vowed to “double the size of the UK’s co-operative and mutual financial services sector” in a bid to “support regional development”.
The Treasury said: “We want to help people save for their future goals and build greater financial resilience across the country. We keep all aspects of savings policy under review.”
