Could ISAs be capped at £100k?

Chancellor Jeremy Hunt has recently come under pressure to place a cap on what people could hold tax-free in their ISA, dramatically cutting the amount that savers could previously hold.  

The Resolution Foundation think-tank recently released a report suggesting that capping the amount people can save in ISAs could be a huge increase for the Government’s annual tax revenue.  

According to the report, capping the total amount people can save in ISAs to £100,000 could net the Government around £1bn extra per year in taxes. This would help offset the estimated £4.3bn that ISAs will cost the Government in foregone tax revenue by the end of the 2023/24 tax year. To put this in context, there are many theories that with regular contributions tied in with the power of compound interest, over time you can be an ISA Millionaire.  

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The Resolution Foundation is also arguing the case for the policy on the grounds of equality, claiming that the current ISA schemes benefit the wealthy.  

“There have been many schemes over recent decades to encourage families to save more… However, little attention has been paid to who does – and does not – benefit from the current schemes,” claimed the Resolution Foundation in their report.

However, there has been significant backlash against the proposal, with some calling proposed limit a ‘tax attack’ and another example of shadow tax with the goal of increasing tax revenue for the Government. 

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 idea for an ISA limit 

Aside from the obvious tax benefits such an ISA cap would provide the Government, the Resolution Foundation also argues 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 750,000 families do not have any savings at all.  

The Resolution Foundation claims that saving 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 must 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 some 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. 

Additionally, some have argued that the timing of the proposal is poor. At a time where Britain has very low levels of savings when compared to other G7 countries and rising inflation with the rising cost of living making saving difficult for people from every income bracket, creating new policies that discourage long-term saving are not only unwanted, but potentially destructive.    

If you’re concerned about the potential cap on ISAs or you’d simply like to discuss your future financial goals, why not get in touch. We’re currently offering anyone with £100,000 or more in savings, investments or pensions a free review worth £500. 

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Please note: A pension is a long term investment. The fund value may fluctuate and can go down. Your eventual income may depend on the size of the fund at retirement, future interest rates and tax legislation’. The FCA does not regulate Tax advice or tax planning.