Chancellor Rachel Reeves plans to use the Budget to revive plans to reform tax-free Isas as the government seeks to support the investment culture.
A person close to the process said the Treasury was considering a £10,000 annual cash limit, the Financial Times reported.
It is understood that there are several possible options on the table and no decisions have been made.
More than 14 million people in the UK are believed to have saved more than £10,000 in cash, and the government believes some of this could be invested in the stock market to improve people’s financial health.
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The Cash Isa limit has been the subject of various rumors in recent months, with speculation increasing earlier in the summer.
The current annual Isa limit is £20,000, all of which can be cashed out if savers choose.
Investments can sometimes outperform cash savings in the long run, but the value of investments can go down as well as up.
Charlotte Harrison, head of home finance at Skipton Group, said: “Building companies, which fund more than a third of first home mortgages, rely on retail deposits such as cash Isas to fund their loans. If Isa income falls, the cost of funding is likely to rise, meaning mortgages could become both more expensive and harder to get.
“It threatens to derail the government’s own goal of building 1.5 million homes, which depends on whether buyers can secure affordable mortgage financing.
“At Skipton we definitely want to get more people investing. But not by penalizing savers who want low risk and flexible options. Cash Isas work. Undermining them doesn’t.
“What is needed now is a government-backed, industry-led campaign to increase financial awareness, which helps people make confident choices when it comes to saving and investing.
“We have raised our concerns directly with ministers and will continue to take a balanced approach that protects savers and supports home ownership.”
Jeremy Cox, head of strategy at Coventry Building Society, said: “Isa’s simplicity is one of its biggest strengths – savers can invest up to £20,000 a year, switch between the stock market or cash, or use a combination of both.”
He added: “The Chancellor needs to be careful not to throw the baby out with the bathwater and encourage people to build up their cash savings.
“An ISA remains one of the most popular ways to save or invest, and our members keep telling us how unpopular changes to their annual cash allowance would be.”
Brian Byrnes, head of personal finance at Moneybox, said: “Reducing your Isa contribution to increase your retail investment is a clear example of the right diagnosis but the wrong prescription.
“While we fully support the Government’s drive to promote a stronger investment culture in the UK, the priority must be to support consumer confidence, not risk undermining it with cuts to cash Isas.”
Denis Cornwall, Head of Direct Channels at Wesleyan, said: “Any move to promote a stronger retail investment culture is welcome if it helps improve financial wellbeing.
“The most important thing for a saver is to make sure investments match personal goals and tolerate factors such as risk and volatility – especially if they’re thinking of moving from a cash Isa to shares and split Isas for the first time.”
Tom Selby, director of public policy at AJ Bell, said: “The Chancellor is absolutely right to challenge the status quo of Isas. Any reforms in the Budget should focus on making it as easy as possible for those with extra cash to invest for the long term.
“Today’s fragmented markets are overly complex and behaviorally illiterate, causing millions of people who could benefit from long-term investing to hold their cash in cash, leaving them vulnerable to the effects of inflation.
“Simplifying Isa by combining the cash and investment versions into one product is an obvious long-term solution, making the system simpler to navigate and removing barriers between saving and investing.”
Michael Healy, chief executive of UK investment and trading platform IG, said cash “is completely incompatible with long-term wealth creation”.
He said: “The chancellor is absolutely right to take aim at this outdated product – and he should go further by removing the cash Isa supplement altogether.”
To promote investment culture, the Financial Conduct Authority (FCA) has outlined plans to close the “negotiation gap” with proposals to allow firms to offer a new type of help called “targeted support” and make proposals to groups of consumers with common characteristics.
A Treasury spokesman said: “Cash savings are important for people who want to put cash away for a rainy day and we’re protecting that.
“But the Chancellor has been clear that he wants to get Britain investing again – so that British businesses can grow and British savers who want to can get more for their money.”
Andrew Prosser, Head of Investments at InvestEngine, said: “Young savers often use cash to make deposits for things like a first home, while older savers use it to meet short-term consumption needs.
“Neither group is likely to want to be exposed to market risk, so lowering the cash limit would not suddenly push them to invest their money.
“Instead, many would only have the same amount of cash outside the Isa wrapper, meaning their interest could be taxed more.
“The result could be that UK savers are worse off and not investing more.
“If the government really wants to increase investment participation, it should focus on making investing simpler and easier and encouraging better financial education, rather than penalizing those who choose to keep their money in cash.”