Halving the annual cash ISA allowance could provide a £7.2bn returns boost for cash ISA holders likely to invest their excess funds, new analysis by IG has indicated.

This comes amid speculation Chancellor Rachel Reeves may use her upcoming Budget to announce a cut in the cash ISA allowance, from £20,000 to £10,000.

Using HMRC data, investing and trading platform IG found that around one third of cash ISA holders – roughly 2.8 million people – currently contribute more than £10,000 each year.

Recent YouGov research also found that 28% of this group said they would invest any money above the new allowance into a stocks and shares ISA.

Combining these figures, IG has estimated this would equate to potential additional returns of £7.2bn over five years for this group of around 784,000 savers – over £9,100 per saver.

UK managing director at IG, Michael Healy, commented: “The Chancellor is absolutely right to tackle the UK’s overreliance on savings, starting with a product that does nothing for long-term wealth creation – the cash ISA.

“Reducing the annual allowance to £10,000 sends the right message that the Government is serious about getting more people investing and we would encourage the Government to go further by abolishing the cash ISA altogether.”

IG said its analysis also refutes claims from building societies that cutting the cash ISA allowance would have a significant impact on mortgage lending, stating that concerns the move could hurt society’s deposits “appear largely overstated”.

Figures from the Building Societies Association (BSA) have shown that building societies hold around 40% of cash ISA balances.

IG’s analysis, however, found that around £1.6bn of cash ISA contributions usually directed to building societies each year – 0.4% of their total retail deposits – could be redirected to investing, indicating minimal impact on the sector.

“Our analysis refutes the claim from building societies that reducing the cash ISA allowance to £10,000 would impact their deposits significantly,” Healy added.

“Suggestions that it could threaten the mortgage market are simply scaremongering. The reality is that this reform is sensible, proportionate, and long overdue. We urge the Chancellor to stick to her guns.”

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