Has Budget day got off to a surprisingly good start? Maybe it has.
John Healey plans to reverse a big Rachel Reeves mistake. More please! (Image: Getty)
Millions of taxpayers will be dreading Labour’s third Budget, after Rachel Reeves’s first two growth-crushing assaults on the UK economy. The best thing John Healey could do today is reverse pretty much everything she did. Sadly, that’s not going to happen. Yet a pre-Budget leak suggests our new Chancellor is about to do something sensible. And it will be great news for savers but a slap in the face for Reeves.
This morning, the Financial Times reports that Healey will abandon Reeves’s plan to slash the annual Cash ISA allowance from £20,000 to £12,000 for savers under 65 from April 2027. That is great news for savers, and a rare moment of common sense from a government that seems determined to make our finances ever more onerous and complicated.
Reeves wanted people to put more money into Stocks and Shares ISAs, rather than Cash ISAs, to give their savings a better chance of growing over the long term. Shares typically outperform cash over the long term, but are highly volatile along the way. It was a noble idea in theory, a disaster in practice. Now Healey is about to kill off her plan.
The overall annual ISA allowance would have remained £20,000, but under-65s would have been restricted to putting just £12,000 into cash. That would have created a two-tier system based on age, penalising younger savers who wanted the security of cash.
Worse, it had all sorts of “unintended consequences” forcing the Treasury to prepare a raft of anti-avoidance rules to stop people getting around the new limit. These included restrictions on transferring money from Stocks and Shares ISAs into Cash ISAs and a 22% charge on interest earned on cash held inside non-cash ISAs.
That is a lot of extra red tape to achieve an uncertain result. Confused savers might have given up on ISAs altogether, rather than invested more in shares.
The policy also threatened banks and building societies, which rely on Cash ISA deposits to fund mortgage lending. Healey appears to have recognised this fiddling was wasting everybody’s time.
Our tax system is insanely convoluted. This type of action needs to be taken across the board. Sadly, Healey is about to add a fiddle of his own (Reeves has played her part too). His proposed £13,036 personal allowance for low income pensioners is a mess. It’s designed to protect those whose only income is the State Pension from income tax but risks more of those unintended consequences. I’ve pulled this reform to pieces. And his Budget may contain plenty of other tax rises and fiddly reforms.
Reeves’s planned inheritance tax changes for unused pension funds are also a right mess, as they will force grieving families having to track down old retirement pots and pay tax on them within six months of death. Industry experts say it’s unworkable.
But at least one unnecessary layer of red tape looks set to disappear today. Even before it even begins. Now, if Healey could apply the same principle to the rest of Reeves’s reforms, we might actually have a Budget to welcome. I’m not holding my breath.