The reasons why wealth needs to be subject to additional taxation has been discussed in another Tax After Coronavirus (TACs) post, with all links being supplied there and so it will not be repeated here.
What was also discussed in that post was that the necessary short term changes to wealth taxation fall into three groups. They are, firstly, to equalise tax rates on equivalent sources of income or allowances. Second, it is by reconsidering those things that should be taxed that are not but might be if the goal of greater equality is to be achieved, and vice versa. In other words, those parts of available tax bases subject to exemptions and reliefs need to be reviewed. Third, it is about creating a more progressive tax system by changing
Capping total ISA contributions
Individual Savings Accounts (ISAs) were introduced in 1999 by the then Labour government. They replaced a previous tax incentivised savings scheme created by the previous Conservative government. What they create is low tax rates on wealth that fuel the inequality in tax rates between labour and unearned income sources.
Although the details of ISA savings rules have changed over the years the logic has remained largely consistent throughout. Any adult person is (subject to minor limits for some types of account) allowed to save in ISA accounts to an annual total limit, which is currently £20,000, and the sums saved are held in accounts where the incomes and capital gains arising are all tax-free. There is, however, no tax relief on transferring sums into the accounts and so no tax charge on any withdrawal from them. Various types of account are now permitted but the limits apply across the types. The sums may be invested in cash and shares to the agreed limits (with minor rule changes having happened over time).
The purpose of ISAs was to encourage savings. The logic was that this helped fund investment in the economy. This is not necessarily true. Savings have, however, been seen to be virtuous and so to be rewarded by generations of politicians. ISAs are one response to that and, as a matter of fact, having access to some savings does increase household resilience and there is likely to be a social benefit to that.
Within the context of discussion on tax and inequality the problem with ISAs is that although there are annual limits to contributions that can be made there are no lifetime limits. As such after twenty years of operation there are now reported to be ISA millionaires i.e. people who have tax-advantaged savings in such accounts amounting to more than £1 million. This means that the tax relief being provided is disproportionately benefitting those already wealthy. This would seem to be an inappropriate use of tax relief if the tax system as a whole is meant to reduce inequality, as its appearance of having a progressive nature implies to be the case.
The solution to this problem is relatively straightforward. A lifetime contribution limit should be introduced. The sum could be discussed, but when £100,000 represents significant savings within the UK at present a cap at this limit would seem appropriate and could be applied from now on, preventing anyone with this sum in ISA accounts from making further contributions in the future.
Notice could then be given to those holding ISA balances of greater than this sum that they must reduce their balances held within a prescribed period or become taxable on returns on balances in the future. The permitted balances that might be retained might be in excess of the £100,000 contribution limit to allow for growth in the balance held since the investment was made over time, but should not be excessively so. A retained balance limit of £150,000 would seem to be entirely fair. This way greater equity could be restored to the savings market and the tax system would cease to subsidise wealth as heavily as it does at present.
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Unlike pensions, which privilege savings from earned income, redressing the balance a little, I don’t see even any justification for the existence of ISAs at all.
I think it would be better to phase ISAs out completely, but I can’t criticize your proposal as a practical step.
I would be so inclined overall
But I know the limits of political possibility
A parallel to this discussion is what level of investments one would need to pay tax on any income or gains arising from the savings.
Let’s say generously that equity investments return 5% as capital or income per year (interest rates are so low it is almost not worth considering debt returns) then you would need £40,000 to get dividends over the current £2,000 allowance, and you would need £246,000 to realise gains over the £12,300 CGT annual exempt amount.
Perhaps the best role of ISAs was creating a simple, familiar, relatively cheap, easy assess savings regime. I can certainly see a role of the tax system in encouraging everyone to put some ready-access savings aside for a rainy day, but essentially uncapped ISA savings are hard to justify, particularly when tax-advantaged pensions savings are subject to a lifetime cap.
How many people do save 20,000 into an ISA each year?
The stats are really quit surprising https://www.gov.uk/government/collections/individual-savings-accounts-isa-statistics
Gosh, so 10m+ subscriptions a year, at an average of about £7,000. About 20% at the maximum. About 20m people with up to £100,000 in total, and about 1m people with more than that.
So this would hit….
Another reason for ISAs was to encourage people to save for their own future. Something that is still hard to make people do voluntarility, viz the introduction of forcing people to save for their future.
Taking Andrew’s figures, £100,000 would give an annual income of £5,000. That’s a tiny amount to attempt to live on in retirement.
But why should we use tax to subsidise wealth?
To persuade people to put aside that wealth so they have something to live on in the future and protect themselves from penury? Piss it up the wall on fast women and hot cars in your 20s and 30s and starve in your 70s? Or prudently not spend it and save it so that you can afford to eat in your 70s.
Society has been all but screaming at people to make provision for their old age for decades, with all sorts of incentives only having marginal effect. Even the current forced conscription into pension schemes is having little effect. The more that society en mass in the form of government can persuade, make easier, compell people to make prudent provision for their own future, the better society as a whole will be.
And as a side effect, while that wealth is not being used by the saver it can be used by other people. Much more socially responsible to save for your future by – in effect – lending it to other people than stuffing it under the mattress where it is lost to the economy.
But ISAs do not put savings in durable assets
Nor do the6 result in any investment, necessarily
All they do is help the financial services industry
Would it be worth having the ISA cap for “ordinary” holdings of cash and shares, but allowing people to exceed the cap in future with Green New Deal investments?
An interesting idea!!!
Makes absolute sense – the £150,000 retained balance seems sensible and the idea above of green new deal investments is a great one – could go long way to accelerating transformation.