Would Rachel Reeves dare launch a tax raid on our ISAs?

When Rachel Reeves increased national insurance for employers in last October’s Budget, she also put a dent in annual pay rises.

Her recent pensions review confirmed she has her eye firmly on the sizeable surplus that’s held in big funds.

Now, is she about to come for your ISA?

The speculation – and fear – is that the chancellor, strapped for cash, is planning a raid on money kept in tax-free savings accounts.

The sums involved are vast. The government spends around £5bn annually on upfront tax reliefs on ISA savings accounts, which allow people to save up to £20,000 every year, with no tax to be paid on any interest, dividends and/or capital gains accrued.

Their purpose is to encourage people to put more of their own money away, not least because those with savings are much less likely to have to call upon the state if they run into trouble.

But, right now, it’s the British economy that needs a helping hand. Ever since former chancellor Gordon Brown first introduced ISAs in 1999, they have become an integral way to save. Almost £750bn is now held in such savings accounts. Taxing those savings in some way would represent a handy means of balancing the shaky books.

The chancellor could dip into the nation’s ISAs by lowering the £20k tax-free savings ceiling. She could introduce a cap to the accruable tax-free total: while there is a limit to how much can be paid into an Individual Savings Account (ISA) each tax year, there is no such restriction to how much that ISA can accumulate over a lifetime.

An even more radical suggestion would be to dispense with ISAs altogether – which would cut the Treasury relief and force savers to consider riskier investments.

Despite the cost of living crisis, we remain a nation of savers. More than 61 per cent of UK adults save money every or most months. But there is still a divide between the haves and have-nots. According to the Resolution Foundation, a think tank aimed at improving life for low-to-middle earners, there are 11 million Brits without anything at all to cover them in the event of a rainy day.

In an attempt to encourage Britain’s poorest to save, previous chancellor Jeremy Hunt extended the Tories’ “Help to Save” scheme until 2025 in his 2023 Budget. This offers a bonus worth up to £1,200 over four years to those in receipt of certain benefits who manage to save. Pretty generous and despite receiving little publicity, the government said 359,200 customers had opened accounts since the scheme launched in September 2018. However, that’s only a small proportion of the three million who could benefit. Saving is not at all easy when you’re struggling to pay for essentials.

Nonetheless, you could easily make the case that this is a better use of resources than spending £5bn on a much wealthier cohort. Resolution made this case in a report entitled “Ineffective Savings Accounts”.

“Vastly more tax relief is given to those on higher incomes as they are more likely to have an ISA and more likely to have substantial ISA savings. In 2018-20, one in two (54 per cent) working-age families in the top 10 per cent of the income distribution had an ISA, compared to less than one in five (18 per cent) in the bottom 10 per cent,” it said.

But as the report also noted, “ISAs are highly popular”, with more than 22 million people having one: two-fifths of the population.

This brings us to the chancellor’s need for funds, which seems to grow more acute by the day. Even after clobbering businesses by raising employer national insurance contributions (NICs) and extending the reach of inheritance tax to include business assets and agricultural land, dubbed the “tractor tax”, the country’s difficult economic situation means she is in danger of breaching her own fiscal rules.

They cover how much she can borrow and while they are self-imposed, they are taken very seriously by the markets, which can and will punish a chancellor who breaks them.

The current crisis has been created by a sharp increase in the costs of government borrowing, driven in part by concerns over Labour’s plans, in part by concerns over America’s plans and in part by concerns about the global economy.

The problem may turn out to be temporary. Goldman Sachs, for example, has said it thinks the crisis will ease over time.

But that doesn’t change the fact that the chancellor’s headroom under her rules has all but evaporated. She is in a nasty bind and may have to either raise taxes (again) or cut spending. The latter would be highly unpopular among restive Labour MPs, who will have seen the party’s dire poll ratings, about which MPs are always worried, even with years to go before they have to worry about their seats.

With all this being the case, it isn’t terribly surprising that people fear a raid, perhaps as soon as April. However, such a move would be massively unpopular among demographics that vote in large numbers and have the capacity to make a lot of noise when they’re unhappy.

The same is true of pensions. There has long been speculation that the chancellor could reduce their tax breaks by, for example, scrapping high-rate tax reliefs and/or reforming (reducing) the amount available via the tax-free lump sum.

But attacking either scheme would be a politically risky move with the government’s popularity scraping the floor and Nigel Farage’s Reform getting its nose in front (according to one poll).

Reeves, whose tenancy in No 11 was confirmed for the whole parliament by prime minister Sir Keir Starmer, is going to face more “tough choices”, particularly if she can’t coax the economy into growth.

The latest forward-looking Purchasing Manager Index brought more woe on that front. Services, by far the biggest part of the UK economy, scored just 50.8 in January, with anything above 50 representing growth. That is the joint lowest rating for 15 months and a decline from 51.1 in December. Firms have also been shedding jobs at the fastest rate in three years (because of those employer NICs).

Based on all this, would Reeves dare to launch a raid on Britons’ savings? I would be shocked if she did. One might even call it “courageous”. And that’s a word that frightens most politicians.