John Healey’s reported plans to reverse the cut to the cash Isa ceiling in his maiden Budget have sparked a row across the City, as banks and brokers butt heads over the end of the controversial measure introduced by his predecessor.

The Chancellor will end plans to lower the annual cash Isa limit from £20,000 to £12,000, the Financial Times reported on Tuesday. 

Cutting the allowance had been designed by former chancellor Rachel Reeves to funnel cash into UK companies and get more amateur investors investing in the stock market

The decision is expected to be welcomed by banks, which are bracing for higher taxes in Wednesday’s Budget, and building societies who rely heavily on deposits in the Isa product to fund mortgage lending.

Building societies were among the most vocal in opposing a cut to the ceiling last year, with the Building Societies Association warning first-time home buyers in particular would be affected.

Writing on X, chief economist at Panmure Liberum, Simon French, said: “The flaws were obvious on the days of last year’s Budget.

“[Restoring the ceiling] may also be part of the package to soften the impact of an enhanced bank levy.”

Banking shares rose on Wednesday after the report that Healey would ditch the plans.

“Cash ISAs are an important funding source for banks and building societies, making the apparent U-turn welcome news for the sector,” said Dan Coatsworth, head of markets at AJ Bell.

End of golden opportunity?

But the end of the plans to lower the ceiling has caused uproar with vocal critics of the cut, including brokers, who previously urged Reeves to go further and abolish the limit altogether to encourage domestic investment.

“The Chancellor has squandered a golden opportunity to help British households,” said Michael Healy, chief executive of IG Consumer.

“At a time when Britain desperately needs growth, protecting tax incentives that encourage people to sit on cash rather than invest is a deeply misguided decision.”

Rob Morgan, chief investment analyst at Charles Stanley, added that “flip-flopping on tax policy” is rarely helpful as many savers will have already shifted portfolio allocations in preparation of the cut.

Carrots over sticks

Tom Selby, director of public policy at AJ Bell, also welcomed the end of Reeves’ “car crash” reforms, arguing the majority of the retail investment industry were not in favour of the added complexity to the product.

“While the central aim of encouraging more people to invest for the long-term was the right one, the route Healey’s predecessor chose to achieve this was painfully convoluted, hardening the border between short-term saving and long-term investing and adding,” said Selby.

He added the creation of a ‘buy now while stocks last’ environment for the full £20,000 cash Isa allowance, “all but guaranteed to achieve the opposite” of the aim to increase retail investing as people opted to pile into cash while they could.

Healey has also argued it was the wrong approach to persuade people to invest more in stocks and shares. One person close to the decision said to the Financial Times that the Chancellor had decided it was “better to use a carrot than a stick” to get people into investing.

Healey is expected to say that it would be better to educate people about the advantages of investing in the stock market to generate higher returns rather than cutting tax breaks on savings.

Isas are exempt from tax on interest, capital gains and income, and are the UK’s most popular savings product. The lowered ceiling was set to be enforced in April 2027.