The Treasury will launch a consultation with the City of London to gather views on reforming the ISA system, which allows individuals to save or invest up to £20,000 annually tax-free.

This move, potentially signalling one of the most significant changes since ISAs began in 1999, follows calls from some financial institutions to limit the amount held tax-free in cash ISAs. Currently, cash ISAs are the most popular type, holding around £300 billion.

The consultation paper might be released alongside the Chancellor’s Mansion House speech in July. Any subsequent reforms could be announced in the Autumn Budget. The Treasury confirmed it is exploring options to achieve a better balance between cash and equity investments within ISAs, though no decisions have been finalised, Financial Times reports.

Reeves aims to foster a stronger “culture of retail investing” in the UK, similar to the US, believing it can yield better returns for savers and support economic growth. Firms like Phoenix and the London Stock Exchange Group have previously argued that redirecting cash ISA funds into equities could benefit both savers and the UK’s stock market. Some, like Fidelity International, have proposed a single ISA product with limits on the cash component.   

While investment platforms like AJ Bell support reviewing the system’s effectiveness in encouraging investment, organisations like The Investing and Saving Alliance caution that reducing cash ISA benefits might not automatically lead to increased stock investment and stress the need for better saver guidance.

AJ Bell CEO, Michael Summersgill, said: “ISAs have grown to become incredibly popular, with over 22 million ISA holders in the UK. But over time a patchwork quilt of ISA products has emerged, each with their own rules and regulations. Starting with a blank sheet of paper, nobody would design the system we have now.

“AJ Bell’s analysis of HMRC figures suggests around £100bn is held by people with £20,000 or more in Cash ISAs who have not invested a penny in Stocks and Shares ISAs. Millions of people have large cash balances – easily sufficient to serve as a ‘rainy day’ emergency fund – but hold no investments whatsoever.”

Mr Summergill continued: “The key to unlocking that investment has to involve simplification. Gimmicks like the ill-fated UK ISA, rightly kiboshed by the chancellor, often sound like an attractive political soundbite. But they’re destined to fail.

“Trying to corral consumers into UK investments by introducing new products, restricting Cash ISA limits or introducing mandatory investment quotas will only add complexity and leave consumers lost in an increasingly complex web of saving and investing rules.

“Reducing complexity and simplifying consumer choice by merging Cash ISAs and Stocks and Shares ISAs into a single account would create a more fluid landscape in which providers could combine the benefits of cash saving and investing with a single product wrapper.”

He concluded: “The current ISA framework labels people either as a cash saver or an investor. In reality, however, most people need a bit of both – cash savings for a rainy day and long-term investments for future growth.

“However, faced with overwhelming choice and complexity, many people choose the path of least resistance and in the end save in cash alone, often never even exploring the investment route at all.”