Elections are a scary time for taxpayers. Manifestos and speeches are chock-full of promises to transform the country. That favourite word of politicians seeking power is dusted off: ‘change’. But what rarely changes is the tax burden, which is set to reach an 80-year high after 14 years of Conservative rule.
As it stands, both the Tories and Labour have pledged not to raise VAT, national insurance, and income tax. While this is not a promise to cut taxes, we’ll take what we can get. The concern, though, must now be about the subtle, insidious ways that government can pick the pockets of working Brits.
One way might be a change to the rules around individual savings accounts (ISAs).
ISAs were first introduced in 1999 to encourage people to save. They replaced personal equity plans and tax-exempt special savings accounts. They soon became a popular form of savings account because they are exempt from income and capital gains tax on any returns of investment, a welcome break for taxpayers.
Currently, there are two main types of ISA: the cash ISA, which is meant to be used as a normal savings account receiving interest payments, and a stocks and shares ISA, which allows investment within specific areas such as government bonds and certain shares. With the general election recently announced, there is interest from both the Conservatives and Labour to introduce a new ‘British ISA’ to excite voters. This British ISA would allow an additional allowance for investments in British stocks.
The most recent ISA data released by the Treasury relate to the 2021-22 financial year and show that there are 22m ISA accounts holding a total value of over £700bn. In recent years, as Britons have battled with high interest rates and inflation, ISAs have been a safe haven for those wishing to protect their investments through uncertain times. ISAs also buck an increasing trend of younger people not saving money, with 1,700,000 under 25s having some form of ISA account.
As a result of these benefits, ISAs have remained popular, meaning that successive governments have broadly left them unchanged except for increasing allowance limits. Unfortunately, in recent years, the annual cap on ISA investment has fallen behind the rate of inflation. Had the cap been raised annually, in line with the inflation rate following 2017-18, the annual cap would be £25,000 instead of the current £20,000.
There has also been a recent shift in the type of ISA that people tend to opt for. Instead of a cash ISA, the stocks and shares version has gained more popularity. In 2021-22, there were 345,000 new subscriptions to this type of ISA, with a decrease of 920,000 to the lower-return cash ISAs.
This shift is not surprising given the ever increasing cost of housing and rising deposit requirements. Stocks and shares ISAs offer a remarkably good return on investment with an average of 9.6%. This means that for a person who can invest the maximum of £20,000 per year, the ISA will have a total value of almost £1.1m after 20 years – a £5,000 yearly investment would see a total ISA value of £78,000 after ten years, enough for a deposit on a house.
The possible returns on ISAs, as well as their ability to encourage saving, make any proposed changes or complications a touchy subject. The Resolution Foundation’s proposal to cap the tax-free limit at £100,000 is especially worrying as their former Chief Executive, Torsten Bell, is a Labour candidate in the general election. This change may be more than the usual murmurs and promises that are seen in the build up to the general election. According to the Taxpayers’ Alliance’s briefing note, this would mean a tax penalty of £138,000 on the £1.1m valued ISA. Even at the more modest £5,000 yearly contribution, there would be a tax penalty of £34,000 after 20 years – a significant blow for those hoping to retire on their ISA savings.
The next government should ensure that ISAs remain completely tax-free while also raising the contribution limit in line with inflation. Saving is necessary for financial independence, the key to getting on the housing ladder, and will almost certainly be key to a successful retirement. Given the precarious state of unfunded pensions, protecting the faithful ISA is the best way to do this.
Click here to subscribe to our daily briefing – the best pieces from CapX and across the web.
CapX depends on the generosity of its readers. If you value what we do, please consider making a donation.
