Reeves's cash Isa reforms in chaos

Rachel Reeves's plans to penalise savers who hold cash in investment accounts have stalled despite months of Treasury meetings, The Telegraph understands.

In last year's Budget, the Chancellor announced the controversial cut to the cash Isa limit from £20,000 to £12,000 for under-65s from April next year.

HMRC said later that it would penalise savers trying to use loopholes to circumvent the limit, including putting cash into stocks and shares Isas.

But industry sources told The Telegraph that after months of talks, the Treasury has not made crucial decisions about how the rules on investment accounts would work in practice.

HMRC has said that, under the new rules, anyone holding cash in stocks and shares accounts - which will retain the full £20,000 allowance in an effort to boost investment in UK markets - will face a charge.

The taxman also said it would not allow "cash-like" investments in the tax-free accounts. Transfers between stocks and shares Isas and Innovative Finance Isas to cash Isas will be banned.

However, the Government is yet to explain key aspects of the rule changes, including how interest earned on cash held in stocks and shares Isas will be taxed.

Previously, there was a flat 20pc tax charge on cash held in stocks and shares Isas, and some firms in the industry, including Hargreaves Lansdown, have pushed for this to be reintroduced.

In March, Treasury forecasts revealed that the reduced allowance would raise an extra £95m in tax over the next five years, as savers move cash to unprotected accounts.

Up to £1,000 in interest can be earned on savings per year by a basic-rate taxpayer before they need to pay tax on it. Higher-rate taxpayers have an allowance of £500, and additional-rate taxpayers have no allowance at all. The tax on savings income is set to rise by 2pc from April 2027.

Clarity is also needed on which investments will be considered "cash-like", and therefore will not be permitted to be held in the tax-free accounts, or subject to a charge.

One source familiar with the process told The Telegraph: "[The Treasury] has done three months of meetings, round tables, and emails... [it] still can't decide what to do."

They added: "It doesn't sound like it's going well."

Another source said savers "should not be punished with a punitive tax penalty just to help achieve this misguided cash Isa cut."

A Treasury source said that both the Treasury and HMRC had been "consulting directly with industry about anti-circumvention rules" ahead of the cash Isa allowance cut, but that the rules had "not yet been set".