John Healey is to use his first budget to ditch plans to slash the annual cash Isa allowance, the Guardian understands, preferring a carrot rather than a stick to encourage people to invest more in shares.

City experts welcomed news that the chancellor will overturn a decision by his predecessor, Rachel Reeves, to cut the allowance from £20,000 to £12,000 a year from April to get more money flowing into UK company stocks.

The reversal is also likely to be popular with banks, which already face higher taxes in the budget, and building societies, as they rely on deposits to fund loans to households and businesses.

Healey is expected to say in his tax and spending statement to the House of Commons on Wednesday that it is better to educate people about the advantages of investing in stocks and shares to generate higher investment returns than to reduce tax breaks on savings.

Finance bosses had warned that the cut could deter consumers from saving and push up mortgage rates.

Cash Isas are the UK’s most…