£100k ISA Cap
Following a recently released report from the Resolution Foundation think-tank, pressure is being placed on Chancellor Jeremy Hunt to place a limit on how much people can hold tax-free in their ISA to £100,000. The Resolution Foundation argued that the introduction of an ISA cap could contribute towards a huge increase for the Government’s annual tax revenue.
According to the report, the introduction of an £100,000 limit on the total amount people can save in their ISAs would net the Government roughly an extra £1bn a year in taxes. This would aid in offsetting the estimated £4.3bn that ISAs will cost the Government in foregone tax revenue by the end of the 2023/24 tax year.
What is an ISA?
An ISA, or Individual Savings Account, is a scheme that allows anybody to hold cash, shares and unit trusts free of tax on dividends, interest, and capital gains. Essentially, it’s a savings account that you don’t pay tax on.
You can save up to £20,000 each tax year and receive tax-free interest payments, so when the value of your cash ISA increases, you get to keep all of it tax-free (source: gov.uk).
Traditionally, while there has been a £20,000 allowance in place for how much you can put in a year, there has not been a cap on how much you can accumulate in an ISA over a lifetime. This proposal would mean that anything you accumulate above £100,000 would no longer be shielded from tax with the ISA wrapper.
The different types of ISAs
There are a variety of ISAs to choose from in the UK, each with their own unique features and benefits. As a starting point, these are the three main types to consider:
Cash ISA
A cash ISA is essentially a tax-free savings account that allows you to invest up to £20,000 each tax year. What’s notable about cash ISAs is that you do not have to pay any tax on the interest you earn. This means that it has an advantage over your standard savings account, where you have a limit at which you can earn before you start paying tax, dependant on your income tax band, and where larger amounts of savings are concerned the difference can be significant. Cash ISAs are available as easy access, notice or fixed term accounts.
Stocks and Shares ISA
Much like the cash ISA, you can accumulate up to £20,000 each tax year and you do not pay tax on any gains made. As the name suggests, in a stocks and shares ISA your funds are invested in a range of assets including stocks, shares, bonds and funds. With many stocks and shares ISAs, you will get to choose where you invest your savings. This means that there is some inherent risk in stocks and shares ISAs as the value of investments can go down as well as up. But broadly speaking, stocks and shares ISAs often provide stronger returns over the longer term.
Lifetime ISA
Lifetime ISAs (LISA) are notable because of the relatively government bonus which boosts returns. Although you can only save up to £4,000 a year in a LISA, the Government will add a 25% bonus to your savings, up to a maximum of £1,000 per year. That means if you put the max amount of £4,000 into your LISA each year, you will be making an additional £1,000 tax-free annually. The caveat is that the money accumulated in a LISA can only be used to either buy your first home, or to be withdrawn after the age of 60 for retirement. Any earlier withdrawal incurs a 25% penalty.
You can contribute up to the maximum of £20,000 in one or a combination of ISAs (subject to funding limits). However, you are not allowed to put money into more than one of the same type of ISA in the same tax year.
You can only pay £4,000 into your Lifetime ISA in a tax year.
Naturally the effectiveness and appeal of ISAs would be diminished should the cap be introduced. For those that have saved diligently into ISAs and already accumulated a sizable pot, the cap will be detrimental to their saving plans.
The ISA cap proposal explained
Aside from the obvious tax benefits such an ISA cap would provide the Government, the Resolution Foundation also argued that their suggestion comes from a place of wealth equality.
According to the report, ISAs currently offer tax relief to 1.5 million people in the UK with £100,000 or more saved, while at the same time 750,000 families do not have any savings at all.
The Resolution Foundation claimed that savings policies in the UK, such as limitless ISAs, unevenly benefit those who already have significant wealth, as they are often used by the wealthy to reduce the amount they have to pay in taxes.
Molly Broome, economist at the Resolution Foundation, commented on the report: 'Britain is not a nation of savers. This lack of financial resilience has left many exposed during the cost-of-living crisis, with families having to build up debts and fall behind on bills.’
'Spending over £2 billion on those with ISA savings of over £100,000, while 750,000 families have no savings at all, is not what a good use of Treasury resources looks like.
'The Chancellor can address both problems in his upcoming Budget by massively expanding Help to Save for low-income families and scaling back tax-free savings for already very-rich individuals.'
However, there has been push-back against the proposed ‘tax attack’ cap on ISAs, with some arguing that punishing those that have worked hard to save responsibly over their lifetimes is not a fair solution.
Ultimately, we will need to wait until the Spring Budget to find out whether the cap will be implemented. We can only hope that it isn’t.
At Investment Champion we offer a Stocks & Shares ISA with an investment style to suit you. When choosing a style of investment to suit your needs, you may want to consider how long you plan to invest for and how much you would like your money to grow. It is also important to understand what movement in value you may or may not be happy with and any potential losses that may happen. That is why soliciting professional advice can be crucial for understanding how to take those first steps towards a secure financial future.
Please note: The Financial Conduct Authority (FCA) do not regulate tax planning.
