UK to Cut Tax-Free Cash Savings Allowance in November Budget, Telegraph Says

UK Government Plans to Halve Tax-Free Cash ISA Savings Limit

Implications of the Proposed ISA Changes

LONDON (Reuters) -Britain's government is likely to halve the amount of cash that people can put in tax-free savings accounts at next month's budget, the Telegraph newspaper reported on Saturday, citing a government minister who said tax incentives needed rebalancing.

Current ISA Regulations

Under existing rules, Britons can save up to 20,000 pounds ($26,842) a year in cash, shares, bonds or investment funds in individual savings accounts, known as ISAs, where the money is not liable for tax on interest, dividends or capital gains.

Government's Rationale for Change

Around a third of Britons have an ISA, with about 726 billion pounds saved in total. Most ISAs are used only for cash savings and rarely use the full 20,000-pound annual allowance.

Concerns from the Treasury Committee

Britain's Labour government said in March that it wanted to promote wider share ownership and provide greater support for companies with listings in London, and that reducing the tax benefits for cash savings was one method under consideration.

Impact on Financial Behavior

In a report published on Saturday, the British parliament's Treasury Committee urged the government not to reduce the cash ISA limit, saying it would not boost share ownership and instead could reduce the supply of mortgages.

Building societies often use cash ISAs as a way of raising funds to provide mortgages to home-buyers.

The parliamentary committee report said a lack of financial education, not tax incentives, was the main reason few Britons invested in shares outside of workplace pension schemes.

The Telegraph said a decision had been made to reduce how much cash can be saved in an ISA, requiring people to invest in shares to benefit from the full tax-free allowance.

"We are looking at the right balance between cash and shares in the ISA. The bottom line is we want people to be better off and one way we can do that is to build a shareholding democracy in this country," the Telegraph quoted financial services minister Lucy Rigby as saying.

The newspaper said a final decision on how much to reduce the cash ISA limit had not been reached, but halving it to 10,000 pounds a year, or a slightly higher limit, were the most likely options.

($1 = 0.7451 pounds)

(Reporting by David Milliken; Editing by Aidan Lewis)