Healey set to drop planned cut to cash Isa allowance in first budget

John Healey is preparing to use his first budget to abandon a plan to sharply reduce the annual cash Isa allowance, according to the Guardian's understanding. The chancellor is said to prefer persuading people to invest more in shares rather than penalising them for holding cash.

The move would overturn a decision by his predecessor, Rachel Reeves, who had intended to cut the allowance from £20,000 to £12,000 a year from April. The aim of that policy was to steer more money into UK company stocks. The Treasury declined to comment on the news, which was first reported by the Financial Times.

Healey is expected to tell the House of Commons in his tax and spending statement on Wednesday that educating people about the benefits of investing in stocks and shares is a better route to higher returns than trimming tax breaks on savings.

City figures widely welcomed the reversal. It is also likely to please banks, which already face higher taxes in the budget, and building societies, which depend on deposits to fund loans to households and businesses. Finance bosses had warned that the cut could discourage consumers from saving and push up mortgage rates.

Cash Isas are the most popular savings product in the UK. All Isas are exempt from tax on interest, as well as from income and capital gains taxes.

Jo Harris, chief customer and operations officer at the wealth management company Quilter, said: "There is a positive in retaining a simple £20,000 allowance that savers understand." She added that if the chancellor believes in encouragement over restriction, other options exist. In her view, the government could consider an extra investment-only allowance on top of the £20,000 Isa limit, together with better financial education and support to build people's confidence to invest.

Not everyone in the City was pleased. Michael Healy, chief executive of IG Group's consumer division, said the chancellor had "squandered a golden opportunity to help British households build long-term wealth and get more money flowing into the businesses that drive our economy."

He pointed out that cash Isa subscriptions rose by £26.1bn last year, more than four times the increase in stocks and shares Isas. In his words, the chancellor has chosen to reinforce "the very savings culture that is holding Britain back."

Healy also said IG modelling suggests that phasing out cash Isas for new contributions could generate up to £610m in additional annual tax revenue by 2032-33, without affecting existing savings.