It seems that I am not alone in worrying about the tax relief on savings, on which I commented last week. Now the Resolution Foundation has looked at the tax relief on ISAs alone and has said:
The cost of living crisis highlights the long-standing issue of there being too many UK families with too little in savings.
However, little attention has been paid to who does – and does not – benefit from the current schemes. This briefing note fills that gap by looking at existing government policy to encourage saving and uses this evidence to outline recommendations that could improve levels of saving and financial resilience particularly among low-income individuals.
Their key findings include:
- The UK has had a persistently lower level of saving over time by international standards. Since 1980, it has had the lowest saving rate of any G7 country in four of every five years.
- We estimate that the total support for savings from the Government is set to hit around £7.0 billion per year by the end of 2023-24 in terms of foregone tax revenue and direct payments to households as interest rates rise.
- Despite tax-free savings allowances have been designed to be progressive, 41 per cent of the £1.3 billion of foregone tax revenue goes to the richest tenth of households.
- The advantages of tax-free savings from ISAs flow mostly to the already-wealthy. For example, for working-age adults, around £3 in every £10 saved in ISAs (29 per cent) are held by those in the top income decile.
- Help to Save – where people are able to save up to £50 a month and receive a 50 per cent top-up from government – is targeted at low-income families as eligibility is determined by benefit receipt. But while satisfaction with the scheme is high (only 3 per cent of people report being dissatisfied with it), take-up is low, with under one-in-ten eligible participants using it.
- Taken together the richest tenth of households are set to gain just under £800 on average from these savings support next year, around 20 times the gains received by the poorest tenth of households (£38).
So why, when cash saving does little for the economy, is money being so poorly targeted in this way?
The time for ISAs to either be given a social purpose linked to the Green New Deal or to be abolished has arrived.
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Is the maximum you’re allowed to have, in total, at a given time, across all ISA types, £20,000?
I ask because that really sounds like it’s aimed at the middle-income saver, and not those with hundreds of thousands, or more, sloshing around.
If that is, indeed, the case it doesn’t sound like it’s giving higher-income earners a huge tax benefit.
Have I not understood correctly?
It’s £20,000 a year
There are now ISA millionaires
OK, understood.
So, why not just change the non-taxable limit, to apply over a multi-year period, so you still encourage the small saver, but those with 100s of thousands, or more, invested in ISAs get subject to the same taxation as any other investment?
Just a strawman idea… I’m sure there are alternatives, but just don’t want to deter small savers.
Simply put a lifetime cap on contritions at, sy, £100,000 max, and maybe less.
I would also note that ISAs (or their predecessor PEPs) were originally created for a social purpose…. by Nigel Lawson, a Tory Chancellor… but that appears lost in the mists of time. They were created to try and deliver greater equity investment in UK companies with restrictions on what investments they could contain.
My point is that when people start frothing at the mouth about the restrictions you suggest you are merely following in the footsteps of Nigel Lawson (!).
Hmmmm…..maybe
Although actually I already do this on equalising CGT tax rates with IT
The differential in CGT and IT rates has a logic behind it.
Using current allowances, someone earning £12,000 a year for each of the next 10 years would pay no income tax. Someone holding an asset which appreciated by £12,000 for each of the next 10 years before selling that asset would have all £120,000 gain taxed in one go in the same year and pay far more tax, even at the lower CGT tax rates. Quite what’s abhorrent about that I’m not sure. Personally I’m in favour of some sort of taper relief where CGT rates are lower the longer an asset is held, to encourage long term investing.
Calling for the equalising tax and CGT rates may be a popular sound-bite but it would be a crude measure that would discourage long term investing. It’s an ignorant proposal.
We will have to disagree
Horizontal tax equity requires that all receipts in bank accounts be taxed at the same rate
In principle I also see no reason for a CGT allowance above say £2,000 for that reason, and that only to save admin costs
If you want to see lower capital gains tax allowances and the equalising of income tax and capital gains tax rates then a good quid pro quo would be the return of indexation relief.
I admit I am not convinced
Cash is just cash at the end of the day
It’s is abhorrent that people who don’t work pay less tax (CGT) on their income than people who actually go to work (IT) !
Part of the problem is George Osborne bumped up the ISA limits to make them more competitive with pensions, so that he could count the tax revenue when salaries were paid rather than when pensions are paid out, reducing the deficit at the time at the cost of future chancellors.
I suspect some pensioners are also well advised to take their 25% tax free lump sum out their pension pot and dump it in an ISA in £20k chunks, rather than leaving it in to be taxed.
Cap the lifetime (net?) ISA contributions seems sensible, but if we have a low savings rate compared to others, is it better to lower it further while making it more equally distributed, or is raising it a worthwhile goal in itself?
Those with low savings don’t need ISAs
They get £1,000 tax free income a year and £12k free pensions. How much more is required?
Yes, so is there still then a fundamental problem that our savings rate is simply too low, and we need something that encourages or outright subsidises saving, is it the distribution of savings (or more generally wealth), or is the savings rate just a number and we should focus on eg increasing the level of capital investment via government spending then the savings rate will take care of itself?
Why is our savings rate too low?
Please explain?
The world is suffering a glut of savings. Why do we want more?
And what about ‘Business Property Relief’ (BPR) qualifying ISAs? You may know that if you move your £1m from conventionally invested cash or stocks & shares ISAs into a BPR-qualifying version – commonly invested in a managed portfolio of AIM (the UK’s ‘junior’ stockmarket) and live for more than two years, then the whole fund it outside of one’s estate as fat as Inheritance Tax (IHT) is concerned. So, instead of a potential £400,000 IHT bill (ignoring inter-spousal transfers for the sake of simplicity) it would be nil.
As an IFA, I have done (as I must) this for a few clients, who accepted higher-risk for the sake of ‘family money’. One couple were both 91 when done and they both got over 2-year the line, just about. The estates saved £800,000+ in IHT! OK, their money, whilst they were alive, was invested in UK micro-cap businesses. But the AIM BPR ISA market is dominated by a small number of participants who effectively control a large slice of the market and they make excellent fees from doing so. Hmm…
That iht loophole needs to go
Agreed about the social purpose.
It is time that is the revelator isn’t it?
Time reveals all the problems we have with these issues and again I can’t believe how much Clara Mattei’s book ‘The Capital Order’ is once again so relevant.
The idea of savings – falsely launched onto working people as an excuse for retarding state spending for their needs even though they can little afford to save, is once again exposed as a ruse to help more wealthier people avoid tax and get rich.
Moving money to those who actually need it less (although there could be some borderline cases where it is useful rather than a get rich scheme).
As someone who worked for 2 years in pensions and investments I was shocked at just how many conmen and women there were employed. at how the whole legislation was totally skewed towards those that already had and against those who didn’t and never would have. After 2 years I had had enough and am ashamed at those I persuaded to take out a pension.
Pensions – those earning plenty getting tax relief @ 40% and the ordinary punter getting 25%. The fact that a Dutchman (I have lived in the Netherlands) will get a pension (private) of 3 x that of a Brit for the same investment is easily explained by the charges that are gouged by various means from UK pension plans and that employers have to contribute. At the particular office I worked from was a senior consultant that scammed people who thought they were taking out a ‘single premium pension plan’ where the salesman earned a maximum 3% of the premium. On a regular/annual pension plan the gouging was 90% of the first year’s premiums. Eventually the scandal came to light and the company had to reimburse those who had been scammed.
PEPs/ISAs – these were only ever going to benefit those who earned enough to actually have money to invest. I live in France,the French tax system refuses to recognise this form of investment and they re taxed at the rate of capital gains (36%).
Until both housing and commercial property are properly controlled and reigned in there is no chance of ordinary Brits having the spare cash to make investments in their futures. I saw yesterday that the average price of a house in London is £667,000 – total and complete insanity. 1997 should have meant the beginning of sanity in the UK but Tony the Liar and Gordon Gekko killed that stone dead from day one from their first day in office.
You want people to save – institute sane rent controls that will destroy the rentier/BTL parasites – the same for commercial properties and ban only upward rent reviews – meaningful capital gains tax on all property deals, 100% on the first 2 years and then a sliding scale – this the reason that property in France was so cheap for so long. Bring in statutory second/private pension schemes as the Dutch have had for decades so that the Dutch retire on 90% of their final salary/wage. In the Netherlands you can own as many properties as you like but you can only live in one and in multi-let houses the local gemeente/council will fix the rents of 50%.
The Netherlands comes right near the top for happy people along with the Scandinavians even though it’s climate is really crappy, try living a winter there – for me it was too crowded I like to breathe in huge open spaces but that’s a personal thing. When my friends visit the UK they always talk about the lack of real joy in people’s lives – the drunkenness, the violence. The UK has been regressive for far too long.
I think the Dutch clearly have this right
We have known for years that UK fees for fund management are far too high and still the continue
The fees for Dutch pensions and UK pensions are not materially different – you really should do your research before making these sorts of comments.
Further the Dutch system is almost exactly the same as the UK system – tax relief is provided on entry, individuals invest in equities which can be traded on a secondary market, and then tax is paid on retirement.
Exactly the things that you have criticised with the UK system earlier this week!
The reason that the Dutch pensions are ‘better’ is that compulsory contributions from employers (and employees) are that much larger.
Evidence I have seen directly contradicts your claims
Bluntly, I do not believe you
That sounds rather like Allied Dunbar, Stuart. Having worked as an IFA for nearly 33 years now, I have to say that I recognize the bad old days but it is true that the sector has very much cleaned up its act, certainly since commission on investment products was banned by the regulator back in 2012.
Pension products, in particular, have become very cost effective, with good plans offering ‘all-in’ fees of 0.35%-0.50%. Some ETF products, tracking, say, the entire UK equity market have fees as low as 0.04%, which is remarkable.
The demise of ‘direct’ sales forces was such a good thing, as was the abolition of exit charges from most legacy and current financial products. One firm still gets away with higher charges and is the AD of today, though. Go figure!