ISA reform: Rachel Reeves scraps plans to cut £20,000 tax-free allowance in major win for savers

The U-turn comes just days after banks voiced strong opposition to the proposed changes, which were part of what would have been the biggest overhaul to the savings system since its creation in 1999. The reversal will benefit millions of savers who use ISAs to protect their savings from taxation.

Speaking to the BBC on Monday, Reeves said: "I'm not going to reduce the limit of what people can put into an ISA, but I do want people to get better returns on their savings, whether that's in a pension or in their day-to-day savings."

She added: "At the moment, a lot of money is put into cash or bonds when it could be invested in equities, in stock markets, and earn a better return for people. But I absolutely want to preserve that £20,000 tax-free investment that people can make every year."

The Chancellor's comments signal a significant climbdown while still emphasising her desire to encourage more equity investment.

The proposed changes to ISAs were first hinted at in February, when Reeves explained she wanted to create "a culture of retail investing" to achieve "better returns" for UK savers. Her deputy, City Minister Emma Reynolds, had also called for the UK to adopt an investment culture "that realises cash is not a good investment".

Reynolds told a House of Lords committee earlier this year: "Why have we got hundreds of billions of pounds in cash ISAs? We have failed to drive an investment culture."

Shortly after these comments, the Treasury announced that a comprehensive overhaul of ISAs would be "under review" ahead of the Autumn Budget later this year.

The banking sector's opposition to the proposed changes became clear last week when Emma Reynolds met with senior executives from major banks, including NatWest, Lloyds, HSBC, Barclays, Nationwide and TSB.

During this meeting, hosted by banking lobby group UK Finance, industry leaders cautioned against any changes "to avoid restricting consumers' options".

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Stuart Haire, chief executive of Skipton Building Society, said: "We agree with the Government that people in the UK should increase, if they have the wherewithal and the risk appetite, the amount of money they have got in equities.

"However, changing the cash ISA limit will not do that, so therefore it's the wrong tool to achieve the policy outcome."

Jason Hollands, Managing Director of online investment platform Bestinvest, commented on the Chancellor's decision: "It seems the Chancellor has bowed to effective lobbying by banks and building societies on this matter following on from a strong backlash from the press."

He suggested alternative approaches to encourage equity investment, saying: "To get more people investing in equities requires a combination of better education, an appropriate regulatory environment so they can get the help they need in choosing a suitable investment, and the potential carrot of additional incentives."

Hollands proposed scrapping stamp duty on UK share purchases within ISAs and potentially providing "a modest income tax credit for subscriptions into Stocks & Shares ISAs".

The U-turn represents a significant victory for the banking sector, with cash ISAs remaining a popular choice among the 18 million people who hold them. Last year, savers stashed away more than £49.8billion in cash ISAs, a 6 per cent increase from the previous year.

While the £20,000 limit will remain unchanged, the Chancellor has indicated that other reforms to how ISAs function may still be forthcoming. These could focus on encouraging more investment in equities without restricting cash options.

Any future changes will likely be revealed ahead of the Autumn Budget, with the government still keen to boost investment in UK domestic assets while balancing savers' preferences.