Britain cuts tax-free allowance for cash savings to spur investing

By Kirstin Ridley

LONDON (Reuters) -British finance minister Rachel Reeves on Wednesday slashed the amount that people can invest in tax-free cash savings accounts from 2027, in an effort to funnel more funds into Britain's stock market and drive economic growth.

Reeves said in her budget speech to Parliament that the annual, tax-free limit for cash investments in an Individual Savings Account (ISA) would be cut to 12,000 pounds ($15,800) from 20,000 pounds, although the over-65s would retain their full cash allowance.

Shares in stock trading platforms rose on Wednesday, with AJ Bell up 2.6% and IG Group 10.3%.

Britons can currently invest 20,000 pounds annually across a variety of ISAs, including cash and stocks and shares products, without paying income or capital gains tax.

CULTURAL AVERSION TO RISK MAY LIMIT TRANSFERS

The Quoted Companies Alliance, a trade body for small and mid-cap companies, told lawmakers last month that around 300 billion pounds was sitting in cash ISAs - the most popular and well-understood ISA - often providing "poor returns".

Britain's Labour government said in March it was considering reducing the tax benefits for cash savings in the hope savers would instead invest in shares to secure better returns, while also providing a fillip for London's beleaguered bourse.

Experts say it is unlikely the changes will lead to a significant transfer into investing, partly because of a cultural aversion to risk, or because savers may choose better-performing overseas markets.

Lawmakers on the cross-party Treasury Committee had urged the government to focus instead on financial literacy. They also warned that cutting the allowance could harm mutually-owned building societies, major providers of cash ISAs and mortgages, by constraining their access to retail savings.

"HUGE GROWTH POTENTIAL" FROM INVESTING

Sarah Coles, head of personal finance at investment platform Hargreaves Lansdown, said Reeves' calculation that investing, rather than saving, could boost returns by 50,000 pounds showed "the huge growth potential offered by investment".

But she added it remained to be seen whether the cut would have the desired impact.

Nicholas Hyett, investment manager at Wealth Club, a non-advisory investment service, said reform made sense.

"Anyone who hits the maximum 20,000-pound cash ISA allowance year-after-year should really be thinking about investing some of that in the stock market," he noted.

Cash ISAs were introduced in 1999 under the former Labour government's finance minister Gordon Brown.

($1 = 0.7594 pounds)

(Reporting by Kirstin Ridley; Editing by Tommy Reggiori Wilkes and Ed Osmond)