I have this morning published the next in my series of proposals that will together make up the Taxing Wealth Report 2024. In this note, I suggest that a lifetime limit on ISA contributions of £100,000 be set and that ISA tax relief now be withdrawn from those who have more than £200,000 in such accounts. This suggestion is intended to prevent abuse as much as to raise revenue. The total tax raised might be £100 million a year, or £0.1 billion.
The summary of this report says:
Brief Summary
This note proposes that:
- The current limits on ISA contributions are not working and are creating opportunity for some to accumulate considerable wealth in the UK in a tax-free environment when that was never the intention with regard to these accounts.
- That the contribution limit to ISA accounts should now be stated as a lifetime limit of £100,000. Transfers between ISA accounts would be ignored for this purpose. Withdrawals would not, however, reset the limit. Those who have now contributed this sum would not be able to make further contributions to ISA accounts.
- That any income or gains on ISA accounts where aggregate balances now exceed £200,000 should be subject to income tax and capital gains tax. If sums held in ISA accounts are not reduced below this level in a reasonable time period then exemption on all such accounts should be lost by the person owning them.
- Given that ISAs were always meant to encourage those with limited means to save more these changes are entirely consistent with the original intention of those who introduced these accounts. The significant increase in contribution limits in recent years has subverted the supposed economic reasons for the existence of these accounts, which are now a simple subsidy to those with wealth and considerable sums to save.
- This recommendation might save £100 million in ISA tax reliefs a year.
Discussion
ISAs now have an established role within the UK savings environment, but no one ever intended that they become a tool for tax planning for the wealthy, which is what they have become.
This proposal is intended to limit the use of ISAs by the very wealthy. It will have little impact on anyone else: the majority of ISA accounts have balances well below the suggested levels in this proposal.
For that reason the revenue-raising potential of this proposal is limited, but that is not the purpose for making it. Tax is as much about policy delivery as it is about revenue, and in this case ISA abuse is undermining the policy reason for these accounts. As a consequence, the rules with regard to them need to be changed.
Cumulative value of recommendations made
The seven recommendations now made as part of the Taxing Wealth Report 2024 would, taking this latest proposal into account, raise total additional tax revenues of approximately £70.3 billion per annum.
Thanks for reading this post.
You can share this post on social media of your choice by clicking these icons:
You can subscribe to this blog's daily email here.
And if you would like to support this blog you can, here:
If I recall, ISAs were first dreamed up as an answer to “lack of investment in UK plc” and initially required investment in equity, not cash/cash like products. Well, they quickly became just a regular savings vehicle but with no tax and besides, as you have long argued, these savings do nothing for investment. So, in short, they have failed in this objective and my starting point is that ISAs should be abolished….. unless they are achieving something valuable in altering savings behaviour.
How about savers’ behaviour? Well, all evidence suggests that the wealthy save whatever the tax position is so the cap you propose makes complete sense. But why not go further? Why not just tweak income/capital gains tax rates/thresholds to achieve the same incentives to save (if that is really what is needed)?
I suspect abolition is your end goal…… but capping things is a good start.
I am aiming for the plausible right now
… which is the correct approach on this issue and all the others you have put forward.
All of your proposals are “oven ready” (if I dare use that phrase) which is why they are so relevant AND getting some traction, I feel.
I agree.
At the moment there’s a £1000 tax exemption on income from savings. With NS&I 1 year bonds at 6.2%, this corresponds to roughly £16000 of savings. Whilst I agree with you proposal, perhaps a future option would be to raise the exemption on savings income somewhat and abolish ISAs altogether. This strikes me as being fairer and simplifies the tax system. There not really any societal value from the effort expended on the ISA industry.
Why do savings need any favours?
Fair point.
Most savings don’t need favours, although it is probably good to encourage everyone to have some savings if they can.
ISAs are a favour to the better off.
I can see the rationale for the change you suggest.
Maybe the lifetime limit is unduly complicated? Maybe just allow tax relief on the first tranche (£100k? £200k) and have done with it?
Longer term, and I understand that is not what your proposals are, maybe just eliminate it?
Perhaps the suggestion of a larger threshold for savings income is too much. Maybe £1k is enought (I can see the point in some threshold simply to minimise administrative complexity for very small savings). The benefit of such a threshold is that it benefits everyone, not just those with enough to have an ISA (and ISA holders get the £1k threshold too, which doesn’t seem fair).
The ifetime limit is easy to track: NI numbers are used to track ISAs. Much easier than specifiying balances, but they too could easily be monitored if required.
Longer term, ISAs probbaly should go. Tax releif should be targeted on green investment alone.
How confident are you that the costs required by the new bureaucracy will not exceed the sums raised by the measure?
Those who exceed the proposed £100K limit will use other savings vehicles which will require them to submit a self-assessment form every year. How much will that cost the tax authorities?
If you had read the note I published (and you obviously did not) you would have seen that those who are likely to have ISA balances over £100,000 are also those who are highly likely to already be submitting tax returns, so your comment makes no sense: the additional cost is probably precisely nothing.
I’m a bit underwhelmed by this one: ISA subsidies cost £4.3bn per year, and this might reduce that by £0.1bn? I guess you may be projecting a small saving in the absence of more detailed data, but it still doesn’t seem like much.
Is this because abolishing all ISA tax exemptions would also affect some people who have neither high incomes nor a lot of wealth, when the aim of this series of proposals is to raise more tax from those who do? That could perhaps be addressed by combining the withdrawal of exemptions for existing ISAs with the introduction of Green ISAs, which would be something like NS&I’s green bonds, but with a tax exemption for a limited period. You could allow (say) up to £100,000 to be rolled over from old ISAs to Green ISAs.
Some proof reading: in the PDF, under “Consultation period required”, it says: “Short, largely because of the familiarity that already exists with multiple rates of corporation tax” – which appears to be misplaced from a different proposal (about corporation tax).
Where can I access the other 6 proposals for a discussion at a Labour Party branch meeting?
Thanks
The web site launches tomorrow, offocially
But start here https://taxingwealth.uk/2023/09/13/the-taxing-wealth-report-2024-recommendations-to-date-and-their-suggested-value/