Cash ISA alert: Rachel Reeves warned cuts to tax free allowance will kill economic growth

The Building Societies Association has issued a stark warning that the move could "undermine" efforts to grow the economy.

The trade body, representing 49 members including Yorkshire Building Society and Nationwide, sent an open letter to Reeves on Monday outlining their concerns.

Industry experts have joined a growing chorus of opposition, fearing that reducing tax reliefs would harm incentives for long-term investment across the UK economy.

The BSA warned that cutting cash Isa limits would make funding "more scarce", potentially resulting in "loans to households and businesses" becoming "more expensive and harder to come by".

This could directly impact mortgage affordability across the UK.

The association stated: "This would undermine efforts to stimulate economic growth, including the Government's commitment to delivering 1.5 million new homes."

The warning highlights a potential conflict between the Chancellor's desire to boost stock market investment and Labour's flagship housing pledge.

In their letter, the BSA argued: "Restricting cash Isas won't encourage people to invest, as it won't suddenly change their appetite to take on risk."

Recent data appears to support the building societies' concerns about the Chancellor's strategy. A survey conducted by stockbroker AJ Bell found that merely one in five savers would consider moving their money to the stock market if cash Isa limits were reduced.

This finding directly challenges the Chancellor's rationale for the proposed cuts, which aims to channel more investment into Britain's struggling stock market.

The BSA has also called for changes to risk warnings that currently "scare people off investing", suggesting these should be reassessed to encourage suitable investment decisions.

The disconnect between the policy's intended outcome and likely saver behaviour has intensified debate over whether reducing allowances would achieve the desired economic boost.

Cash Isas remain the most popular savings vehicle in the UK, with approximately 18 million people using them annually. Last year saw savers deposit a record £49.8bn into these accounts, marking a 6% increase from the previous year.

The accounts have existed since 1999, when Gordon Brown introduced them with an initial £7,000 annual allowance. The limit has been frozen at £20,000 since the 2017-18 tax year.

City executives have previously advised Ms Reeves to slash the allowance to as little as £4,000. Intense lobbying has emerged from both sides, with City firms pushing for reductions to boost stock market investment whilst building societies defend the current limits to maintain their lending capacity.