The move is part of a broader government strategy to divert household savings into the UK stock market, following a period of limited corporate flotations and companies defecting to US exchanges.

While the cash allowance is being tightened, plans for a controversial “Brit Isa” have been abandoned. The proposed scheme, which would have required a voluntary minimum 20 per cent allocation to UK equities, faced significant backlash from the Investment Association and Isa providers. Industry leaders argued the measure would undermine risk regulation and was largely unnecessary given existing UK weightings in many portfolios.

The overhaul has generated a mixed response. Tom Selby, director of public policy at AJ Bell, warned there is “scant” evidence that reducing the cash allowance will successfully incentivise investment in UK companies. However, he welcomed the decision to scrap the “fundamentally flawed” Brit Isa.

Stephen McGee, chief executive of Scottish Friendly, has previously urged the Chancellor to seize the opportunity to shift the nation’s “cash mindset”, describing the cut as a step towards a “US-style long-term investing culture”. Mr McGee suggested an even lower cap of £8,000 would have been ideal to boost productivity and household wealth.

The reforms are expected to be broadly revenue-neutral for the Exchequer. The Treasury has declined to comment ahead of the official announcement.