The FT personal finance pages included a question yesterday that resonated with me. Paul Lewis asked why we still have ISAs. He calls them tax havens for the rich.
Many in the UK will, of course, be familiar with Individual Savings Accounts that permit UK resident individuals to save generous sums annually on which the subsequent income and gains are then tax free. These have been available since 1999 and it is possible for people to have an ISA portfolio worth hundreds of thousands of pounds by now.
I tried to get the TUC and to campaign for their abolition as long ago as 2008. I failed then. I am glad the FT asks questions about them now. I do so for at least five reasons.
First, this country does not need savings. We need investment and the two are not the same thing. We have a glut of savings and a shortage of investment. Bluntly we're subsidising the wrong thing in economic terms.
Second, we're subsidising the wrong people. Those with ISAs by and large already have considerable savings. ISAS are then in most cases tax relief for those who would either already be saving or who are already well off. Not to be too unsubtle, we're subsiding the savings of the well off.
Third, this means ISAs are instruments that increase inequality in the UK. It's absurd that we are subsidising that.
Fourth, this matters because according to HMRC subsidising ISAs costs £2.8 billion in lost tax revenue a year.
Fifth, I can think of innumerable better uses for that money.
Try as I might I can think of no reason for retaining ISAs unless they are linked to very specific investment linked goals. Green energy ISAs and social house building ISAs might do that. Anything else is just wasted money.
And whilst I am at it, the other savings reliefs for the best off, like Venture Capital Trusts, the EIS scheme, and the like are as useless. I would scrap them too. That would release more than another £1.7 billion a year for far more productive and socially equitable use. Check in the absurd savings allowance and that goes to over £2 billion.
Suggestions anyone?
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Completely agree!
Wasted money? Because an extra £2bn in tax receipts wouldn’t be wasted by fiscally incontinent governments?
Last time I checked someone who owned shares in a company was an “investor” therefore someone with shares, or bonds, is investing as well as saving. It’s absurd New Labour thinking that only government spending can be classed as investment.
How dare people take responsibility and save for their futures. Perhaps of more people did that then we wouldn’t have such a social care funding crisis.
Oh dear
You really do need to get siomne facts right
And to ponder how popular making those with savings pay for social care is
So we can only implement policies that are popular? Heaven forbid we ask people to make a contribution towards the requirement for their care.
I need to get some facts right? If you think your blinkered viewpoints are facts it’s little wonder you’ve written the nonsense you have. Subsidising the well off? Those horribly evil rich young couple trying to save for a deposit on a house.
You talk about higher tax receipts being redistributed for more socially equitable use. ISA savings are made up of post-tax income – if it’s only the horribly, filthy wealthy people saving into them then they’ve probably earned a slight repreive from the extortionate levels of tax levied on them in the UK. 62% marginal rates on earnings between £100,000-£123,000? How about we address how socially equitable it is to tax nearly two thirds of someone’s earnings.
Your “facts” are merely your opinionated political leanings.
So what are your facts?
Is there any research you have done to support them?
Well done.
ISA’s in my view just encourage people to think that tax is bad and also plants the idea of avoiding paying something than benefits everyone.
And you are right – only those with well paid jobs can afford to make the most of them.
I have always agreed with Steve Keen (and Will Hutton before him) in that our investment holdings are under too much pressure to produce too high a returns in too short a time.
We need to lock in investment for longer periods (Keen suggests a minimum of 5 years) which would be easier on business but also might help to find a more beneficial home for those savings?
We need to start thinking more long term about money and profit generation. It may help to prevent any more of the rampant loss of jobs and lowering of wages that we have seen for too long in our economy.
Richard, dont always agree with you but on ISAs I do. Actually, the investment value can run to well in excess of £1m. With average dividend yields at say 3% (a bit light) thats £30k untaxed income every year to people, who by definition, have more than the vast majority in the first place.
EIS has uses as it is targeted (now very narrowly) at businesses that need risk capital.
Your best point is that its not savings that are a problem; its that the savings are invested into products that only benefit the economy remotely. We get a better bang for our tax buck if we target the savings into directly beneficial investments.
Thanks
Yes, I used to buy the argument that saving was virtuous because I bought the line that
savings=investment but as we now know in a fiat money world
neither banks nor governments need savings to invest.
Private sector investment is demand driven, i.e., we need debtors (borrowers) that promise to do something for the economy to grow.
We do not need savers they are the lazy rent seekers, and there should be no tax incentives to encourage rent seeking.
Without savings there’s many things I couldn’t have done like buy a house or a car etc. While I can see Richard’s argument which is basically where subsidizing the better off. I also know that the reason why there’s a savings glut is because investment is so low. As Keynes explained many years ago when the private sector cuts back on investment the government should step in and make up the shortfall. This can be done by the government building more house’s, schools and hospitals etc. Instead of blaming people for saving should we not be tackling the economic system which booms and busts. This is something our grandparents learnt and is why after world war two people voted for government’s that would intervene in the economy.
I am not saying saving is wrong
I am saying we don’t need to subsidise it
That’s all
“this country does not need savings. We need investment”
– you have proposed a Uk Investment Bank – close the ISAs & have the UKIB issue bonds/paper/shares whatever to the people that currently invest in ISAs. Maybe structure like ETF (exchange traded funds) so you can invest in a portfolio (bit like the ISAs). Taxation of the resulting “benefits” – I leave to others – could link this to NI/tax payments – what you want is people investing in productive assets – which is what (one assumes) the UKIB would do.
That was my plan…
And for that I may give some tax relief
I think ISAs can still offer a useful role for generating additional pension funds at retirement age, avoiding the complex pension scheme rules and using a much simpler tax structure. These funds could certainly be linked to green investment though.
Is it right to earn interest or not? Or just a reasonable interest?
Ordinary savers are not receiving anything like a fair interest rate.
I think that QA has something to do with this.
Get rid of ISAs on condition that decent interest-paying accounts are made available.
Or have I missed something?
There is a savings glut
So interest rates are low
No one wants them
That’s the way the market works
And yes QE did impact this
But overall society is vastly better off when interest rates are low: interest is an impediment to the realisation of most economic well being
Amen to that.