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What is an Isa and how might the rules change?

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Kevin Peachey

Cost of living correspondent

Getty Images Woman sits at a desk with paperwork and a laptop in front of her. A smartphone in her hand has a calculator on the screen.Getty Images

Chancellor Rachel Reeves is expected to announce changes to tax-free Individual Savings Accounts (Isas) on Tuesday.

It its thought she may set out new rules to encourage more investment in stocks and shares Isas.

What are Isas and how much money can you save in them?

An Individual Savings Account (Isa) is a savings or investment product which is treated differently for tax purposes.

Isas are offered by a host of banks, building societies, investment companies and other financial providers.

Any returns you make from an Isa are tax-free, but there is a limit to how much money you can put in each year.

The current £20,000 annual allowance can be used in one account or spread across multiple Isa products as you wish.

These accounts do not close automatically at the end of the tax year. When the next tax year begins, you can open a new Isa or – in some cases – can keep adding money to your existing accounts.

You have to be 18 to open an Isa. You also have to live in the UK or be a member of the armed forces or a so-called Crown servant who works abroad.

Isas were first introduced by then-chancellor Gordon Brown in 1999, but the annual allowance and the way they work have changed several times since then.

What is the difference between cash Isas and stocks and shares Isas?

Cash Isas are typically offered by banks or building societies, and function like a normal savings account.

Savers pay in money and interest gets added on top.

With regular saving accounts, once the interest goes above a certain threshold, you start to pay income tax.

A basic rate taxpayer can earn £1,000 in savings interest a year before paying tax. For higher rate taxpayer the limit is £500, but additional rate taxpayers don’t have any allowance – they pay tax on all their savings income. Those on low incomes may get an extra allowance.

When the money is saved in a cash Isa, the interest is tax-free, however much you earn.

Cash Isas are very popular, with millions of savers holding billions of pounds in them.

Stocks and shares Isas work in much the same way.

However, instead of simply being held in an savings account, the money is invested in shares in companies, unit trusts, investment funds or bonds.

Unlike other investments any returns are protected from income tax and capital gains tax.

Crucially, while the returns can be greater, so too are the risks. The amount of money you have in a shares Isa can go down as well as up.

What other types of Isa are available?

Junior Isas allow young people to save – or let their parents save for them – until they reach 18 – when they can access regular Isas.

Lifetime Isas (Lisas) are designed to help people save towards a deposit when buying a first home, or for retirement. Savers can put in up to £4,000 a year and the government adds an extra 25%.

However, critics argue the rules about how they work are too strict, and some savers have fallen foul of property purchase price limits.

Innovative Finance Isas let people use other types of financial arrangements such as peer-to-peer loans, without going through a bank.

How might the Isa rules change?

Despite a lot of media speculation, the chancellor has not yet set out her plans.

Documents released by the Treasury as part of the Spending Review in June said only that the government was “looking at options” for Isa reform.

It wants to “get the balance right between cash and equities [shares] to earn better returns for savers, boost the culture of retail investment, and support the growth mission”.

However, there is an expectation that Reeves will make an announcement at the annual Mansion House speech in the City of London on 15 July.

Many experts think she will reduce the annual allowance for putting money into a cash Isa.

Some have argued that she should scrap cash Isas completely, but that is considered extremely unlikely.

Why might the government cut the cash Isa limit?

It is thought the government wants to encourage savers to put money into stocks and shares Isas instead of cash Isas. This could potentially benefit British companies, and boost economic growth in the UK.

Many investment companies which sell stocks and shares Isas back the change, while banks and building societies who dominate the cash Isa market are against it.

Those in favour say there are billions of pounds languishing in savings accounts, which do not need to be accessed in a hurry.

They say that money could be better used for personal, and the greater, good by being invested in stocks and shares in the long-term, rather than sitting in savings accounts.

They want any change to the Isa rules to go hand-in-hand with other reforms to encourage personal investing.

What are the pitfalls of cutting the cash Isa allowance?

Opponents say there is little evidence that the move would encourage people to invest in shares instead of saving in cash.

They warn many people may not save at all, or would simply pay more tax on any money held in non-Isa accounts.

Building societies, in particular, point out it would also reduce the amount of money they receive from savers’ deposits which can then be lent out as mortgages or other loans.

As a result, the cost of borrowing could rise.



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No imminent change to tax-free allowance

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There will be no immediate changes to cash Individual Savings Accounts (Isas), the BBC understands.

Chancellor Rachel Reeves was widely expected to announce plans to reduce the £20,000 tax-free allowance.

The move was aimed at encouraging more investment in stocks and shares, which the goverment says it will still focus on.

“Our ambition is to ensure people’s hard-earned savings are delivering the best returns and driving more investment into the UK economy,” a Treasury spokesperson said.

The Treasury is expected to continue to talk to banks, building societies and investment firms about options for reform.

An Isa is a savings or investment product that is treated differently for tax purposes.

Any returns you make from an Isa are tax-free, but there is a limit to how much money you can put in each year.

The current £20,000 annual allowance can be used in one account or spread across multiple Isa products as you wish.



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UK economy shrank unexpectedly in May

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The economy shrank by 0.1%, the second month in a row it has contracted.



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Trump threatens 35% tariffs on Canadian goods

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US President Donald Trump has said he will slap a 35% tariff on Canadian goods starting 1 August, even as the two countries are days away from a self-imposed deadline to reach a new deal on trade.

The missive came as Trump also threatened blanket tariffs of 15% or 20% on most trade partners, and said he would soon notify the European Union of a new tariff rate on its goods.

Trump announced the latest levies on Canada on Thursday in a letter posted to social media and addressed to Prime Minister Mark Carney.

The US has already imposed a blanket 25% tariff on some Canadian goods, and the country is feeling the pain of the Trump administration’s global steel, aluminium and auto tariffs.

The letter is among more than 20 that Trump had posted this week to US trade partners, including Japan, South Korea and Sri Lanka.

Like Canada’s letter, Trump has vowed to implement those tariffs on trade partners by 1 August.

The US has imposed a 25% tariff on all Canadian imports, though there is a current exemption in place for goods that comply with a North American free trade agreement.

It is unclear if the latest tariffs threat would apply to goods covered by the Canada-United States-Mexico Agreement (CUSMA).

Trump has also imposed a global 50% tariff on aluminium and steel imports, and a 25% tariff on all cars and trucks not build in the US.

He also recently announced a 50% tariff on copper imports, scheduled to take effect next month.

Canada sells about three-quarters of its goods to the US, and is an auto manufacturing hub and a major supplier of metals, making the US tariffs especially damaging to those sectors.

Trump’s letter said the 35% tariffs are separate to those sector-specific levies.

“As you are aware, there will be no tariff if Canada, or companies within your country, decide to build or manufacture products within the United States,” Trump stated.

He also tied the tariffs to what he called “Canada’s failure” to stop the flow of fentanyl into the US, as well as Canada’s existing levies on US dairy farmers and the trade deficit between the two countries.

“If Canada works with me to stop the flow of Fentanyl, we will, perhaps, consider an adjustment to this letter. These Tariffs may be modified, upward or downward, depending on our relationship with Your Country,” Trump said.

President Trump has accused Canada – alongside Mexico – of allowing “vast numbers of people to come in and fentanyl to come in” to the US.

According to data from the US Customs and Border Patrol, only about 0.2% of all seizures of fentanyl entering the US are made at the Canadian border, almost all the rest is confiscated at the US border with Mexico.

In response to Trump’s complaints, Canada announced more funding towards border security and had appointed a fentanyl czar earlier this year.

Canada has been engaged in intense talk with the US in recent months to reach a new trade and security deal.

At the G7 Summit in June, Prime Minister Carney and Trump said they were committed to reaching a new deal on within 30 days, setting a deadline of 21 July.

Trump threatened in the letter to increase levies on Canada if it retaliated. Canada has already imposed counter-tariffs on the US, and has vowed more if they failed to reach a deal by the deadline.

In late June, Carney removed a tax on big US technology firms after Trump labelled it a “blatant attack” and threatened to call off trade talks.

Carney said the tax was dropped as “part of a bigger negotiation” on trade between the two countries.

The Prime Minister’s office told the BBC they did not have immediate comment on Trump’s letter.



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