What is an Isa and how might the rules change?

Chancellor Rachel Reeves is expected to announce changes to tax-free Individual Savings Accounts (Isas) on Tuesday.

It its thought she may set out new rules to encourage more investment in stocks and shares Isas.

An Individual Savings Account (Isa) is a savings or investment product which is treated differently for tax purposes.

Isas are offered by a host of banks, building societies, investment companies and other financial providers.

Any returns you make from an Isa are tax-free, but there is a limit to how much money you can put in each year.

The current £20,000 annual allowance can be used in one account or spread across multiple Isa products as you wish.

These accounts do not close automatically at the end of the tax year. When the next tax year begins, you can open a new Isa or - in some cases - can keep adding money to your existing accounts.

You have to be 18 to open an Isa. You also have to live in the UK or be a member of the armed forces or a so-called Crown servant who works abroad.

Isas were first introduced by then-chancellor Gordon Brown in 1999, but the annual allowance and the way they work have changed several times since then.

Cash Isas are typically offered by banks or building societies, and function like a normal savings account.

Savers pay in money and interest gets added on top.

With regular saving accounts, once the interest goes above a certain threshold, you start to pay income tax.

A basic rate taxpayer can earn £1,000 in savings interest a year before paying tax. For higher rate taxpayer the limit is £500, but additional rate taxpayers don't have any allowance - they pay tax on all their savings income. Those on low incomes may get an extra allowance.

When the money is saved in a cash Isa, the interest is tax-free, however much you earn.

Cash Isas are very popular, with millions of savers holding billions of pounds in them.

Stocks and shares Isas work in much the same way.

However, instead of simply being held in an savings account, the money is invested in shares in companies, unit trusts, investment funds or bonds.

Unlike other investments any returns are protected from income tax and capital gains tax.

Crucially, while the returns can be greater, so too are the risks. The amount of money you have in a shares Isa can go down as well as up.

Junior Isas allow young people to save - or let their parents save for them - until they reach 18 - when they can access regular Isas.

Lifetime Isas (Lisas) are designed to help people save towards a deposit when buying a first home, or for retirement. Savers can put in up to £4,000 a year and the government adds an extra 25%.

However, critics argue the rules about how they work are too strict, and some savers have fallen foul of property purchase price limits.

Innovative Finance Isas let people use other types of financial arrangements such as peer-to-peer loans, without going through a bank.

Despite a lot of media speculation, the chancellor has not yet set out her plans.

Documents released by the Treasury as part of the Spending Review in June said only that the government was "looking at options" for Isa reform.

It wants to "get the balance right between cash and equities [shares] to earn better returns for savers, boost the culture of retail investment, and support the growth mission".

However, there is an expectation that Reeves will make an announcement at the annual Mansion House speech in the City of London on 15 July.

Many experts think she will reduce the annual allowance for putting money into a cash Isa.

Some have argued that she should scrap cash Isas completely, but that is considered extremely unlikely.

It is thought the government wants to encourage savers to put money into stocks and shares Isas instead of cash Isas. This could potentially benefit British companies, and boost economic growth in the UK.

Many investment companies which sell stocks and shares Isas back the change, while banks and building societies who dominate the cash Isa market are against it.

Those in favour say there are billions of pounds languishing in savings accounts, which do not need to be accessed in a hurry.

They say that money could be better used for personal, and the greater, good by being invested in stocks and shares in the long-term, rather than sitting in savings accounts.

They want any change to the Isa rules to go hand-in-hand with other reforms to encourage personal investing.

Opponents say there is little evidence that the move would encourage people to invest in shares instead of saving in cash.

They warn many people may not save at all, or would simply pay more tax on any money held in non-Isa accounts.

Building societies, in particular, point out it would also reduce the amount of money they receive from savers' deposits which can then be lent out as mortgages or other loans.

As a result, the cost of borrowing could rise.