Rachel Reeves was last night warned that axing tax-free saving pots could crash the mortgage markets.

The Chancellor has been lobbied by City bosses in recent weeks about scaling back the tax breaks on cash Isas used by eight million savers each year.

Major firms argue that almost £300 billion sitting in cash Isas would generate better returns – and help Labour’s growth mission – if it was instead invested in the much riskier stock market.

Ms Reeves, left reeling this week after the Bank of England slashed its 2025 growth forecast in half, is understood to be open to proposals that include axing or significantly reducing the annual £20,000 cash Isa tax-free allowance.

But she has been warned by the country’s top building societies that the moves would cause mortgage rates to rise and lenders to pull deals.

In a strongly worded letter, seen by the Daily Mail, the Building Societies Association cautioned of ‘knock-on impacts’, with chief Robin Fieth writing: ‘Cash Isas form a key part of many people’s savings, whether that is for their emergency buffer, saving towards a dream holiday, or protecting some of their wealth from changes in the stock market.

‘The implication made by many of those calling for curbs on cash Isas is that the savings are lying idle and not supporting economic growth. But banks, building societies, credit unions and other providers use the deposits to fund loans to households and businesses.’

Mr Fieth said any move to reduce the appeal of cash Isas would mean less money flowing into banks and building societies, forcing them to restrict lending, driving up mortgage prices and potentially causing a housing market downturn.

Rachel Reeves has been lobbied by city bosses in recent weeks to scale back tax breaks on cash Isas used by eight million savers each year, but building societies say the move could hit savers and trigger a mortgage crisis

Major firms argue that almost £300 billion sitting in cash Isas would generate better returns if the funds were invested into the stock market

It is rare for the BSA to make such a direct intervention and is a sign of just how serious fears are that the Chancellor could wield the axe.

It comes after financial companies met the Chancellor last month, urging her to refocus Isas on investing rather than saving.

Currently, 40 per cent of the £726 billion held in Isas is in cash rather than stocks and shares. The accounts were launched in 1999 and have become hugely popular.

Andy Briggs, of giant pensions firm Phoenix Group, is among those demanding change. ‘The state should not be giving a tax break for us all to park our money in cash,’ he said.

He told the Mail he is urging the Chancellor to align Isa tax incentives with the Government’s ‘very welcome growth agenda’. Ms Reeves has already called for the creation of pension mega funds to drive growth by using their financial muscle to invest in the country’s infrastructure and tech start-ups.

A worst-case scenario would be for all the tax breaks to be removed from cash Isas. But the Chancellor would more likely seek a reduction in – or scrapping of – the annual cash Isa allowance, currently set at £20,000.

Currently, 40 per cent of the £726 billion held in Isas is in cash rather than stocks and shares (file photo)

The BSA says almost half of cash Isas are held by people with incomes of less than £20,000 a year, and the average savings balance is just under £13,400.

Mr Fieth wrote: ‘I am writing to put on record how strongly we disagree with the recently reported calls from City firms to restrict cash Isas. We urge you to maintain this important savings incentive.’

Tom Riley, a director of Nationwide, said abolishing cash Isas ‘would have a direct impact on [Nationwide’s] ability to support those looking for their first home – as well as hitting the pockets of customers saving for the future’.

The Treasury said last night: ‘We want to help people save for their future goals and build greater financial resilience across the country. We keep all aspects of savings policy under review.’