A senior Tory MP has said no to proposals for a ‘cash Isa’ after it emerged ministers were considering a tax-free personal saving scheme to cover the rising costs of caring for an ageing population.

Dr Sarah Woolaston, the chair for the Commons health and social care select committee, said the plans were a “colossal mistake” that would only serve as a solution “for a small minority of wealthy people.”

The policy proposal for the new Isa will be outlined in the autumn’s social care green paper and could allow any unspent funds in the Isa after death to be passed on tax free to the holder’s family.

A spokesperson for the committee said: “In developing the green paper we are looking at how we can support people with the costs of their care in a way that is fair to all generations.”

A Which? report stated only 12% of people aged 55 or over have put money aside for their care in later year.

Currently when an individual dies, any money left in an Isa investment is automatically rolled into their remaining estate, which is potentially subject to the inheritance tax rate of 40%.