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Proposals on Limiting ISAs

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The Resolution Foundation has released a report looking at “the Government’s policies to encourage household saving”, it particularly focuses on ISAs and notes that capping ISAs could raise £1bn in tax for the Treasury.  

https://www.resolutionfoundation.org/publications/isa-isa-baby/ 

The report proposes a cap on ISAs of £100k but is unclear if that’s a cap on total contributions or a cap on the total value of an ISA.  At one point the report suggests that “individuals would need to choose what accounts to withdraw in order to meet the overall £100,000 limit.”; this seems an overly complicated and impractical proposal that wouldn’t easily cope with fluctuations in equity values, for example.  

At £20k per annum the existing contribution limits for ISAs are very generous and only very wealthy individuals can fully utilise them every year.  Looked at in isolation it’s difficult to find genuine reasons why the very wealthy should be given such large tax incentives.  However, the £1bn of additional tax, that the Resolution Foundation claim would be collected, looks insignificant in the context of HMRC’s recent annual summary on tax-reliefs.  It notes, for example, that the cost of pensions tax relief was an estimated £51.6bn in the 2021/22 tax-year split across £26.9bn of income tax and £24.7bn of National Insurance. 

https://www.gov.uk/government/statistics/main-tax-expenditures-and-structural-reliefs/non-structural-tax-relief-statistics-january-2023  

It’s also worth noting that the top 1% of earners pay almost 30% of all income tax and that that increases to 50% when looking at the top 5% of earners.  So, it’s worthwhile making an effort to make sure that those people stay here and pay their taxes here, which is sadly not the case as the Telegraph recently reported that the “ultra-wealthy are deserting the UK”. 

https://www.telegraph.co.uk/tax/news/repeated-tax-raids-driving-ultra-wealthy-britain-costing-us/  

To paraphrase Jean-Baptiste Colbert: Taxation is the art of plucking the goose with a minimum of hissing.  That millionaires are fleeing the UK for lower tax jurisdictions is an indication of “hissing”, but it seems unlikely that tinkering with ISA allowances would change that flow of traffic.   

Capping the total value of an ISA seems overly complicated, but it would be relatively simple, for example, to reduce the maximum annual contributions to £6k (£500 a month) and cap life-time contributions to £100k.  Existing ISA accounts should be grand-fathered but historic contributions would count to the £100k life-time cap.  I appreciate that these limits are a lot smaller than the current ones but, if I think very hard, I struggle to justify such large tax incentives that only the super wealthy can fully utilise. 

Kevin Taylor 

12 Comments
  1. rogerwlawson says:

    It’s not just the “super-wealthy” who can afford to use the £20k annual ISA allowance. The number of ISA millionaires is only about 1500 after last years poor market performance and in reality they would have been saving into them since before 1999. The real beneficiaries have been those who have had a lot of patience and have deferred gratification by saving for the future. Putting a cap on contributions will deter people from saving altogether.
    The Resolution Report is politically slanted in my opinion.

    ISAs have helped to encourage everyone to invest in businesses although cash ISAs are somewhat dubious in my view.
    ISAs have been a great success in helping to encourage an investment philosophy and if the tax relief was reduced all that would happen is that instead of investing the money it would be spent on luxuries, foreign holidays etc.

  2. Toby Keynes says:

    I’ve been thinking about ISA caps for a while – since well before the latest rather vague proposals from the Resolution Foundation.

    I don’t believe it’s appropriate that the 2,000-odd citizens whose ISAs exceed £1 million in accumulated value should be able to continue adding to their tax-free pile; an ISA cap is appropriate, and of course it would need to based on all the ISAs held by an individual.

    I believe any cap should be based on their value at the start of each tax year, not on the amount that has been contributed over the years:
    * value on 6th April should be easy to establish for all tradeable securities;
    * whereas it may be completely impossible to establish the amount contributed to an ISA over (in some cases) many decades and a succession of ISA platforms; I doubt that there is any legal obligation on the platform provider to maintain a historic record of contributions going back to the start of the ISA (or its predecessor PEP in some cases);
    * the value of an ISA (or ISAs) just seems much more relevant to me: an owner who has paid in £100,000 over the years, but whose ISA or ISAs have shrunk in real value, is much more in need than the owners whose £50,000 of payments have grown tenfold though skill or luck.

    The ISA should be capped simply by not allowing further contributions in any tax year at the start of which the ISA’s value exceeded the limit.
    “No contributions this tax year” is far more straightforward than the absurdly complicated pensions capping regime with its built-in punitive tax penalties for anyone who goes over the limit.
    Unlike pensions, the owner is not given a bonus from state funds, or tax relief on their contribution, when they pay into an ISA; the benefits only come within the ISA. So if you withdraw funds from the ISA but pay funds back in at a later date you are not double-dipping and playing the system to gain additional benefits; you are simply losing the tax advantage on those funds for as long as they are not within the ISA.
    If an ISA’s value exceeds the cap at the start of one year, but falls below it in the next (whether that’s because of investment performance, withdrawals or an increase in the cap), there’s no reason why you should not be able to start contributing again.

    There are also the questions of how high the annual limit should be, and how high the value cap should be.

    I don’t believe the annual limit should be dropped dramatically; even someone on an average or low income may receive a lump sum inheritance. Reducing the limit to £5,000 would prevent those with private wealth or high income from maximising their benefits in the short term, but it would also discourage those on average or low incomes from investing everything they can, when they can – and a lump sum that sits uninvested as a result is wasting in value and begging to be spent instead of being held back for a later year.

    So the value cap is what really counts.
    It needs be high enough to form a really adequate nest egg. People need to be able to see that contributing to an ISA is worth the effort because it could potentially make a real difference to their lives in retirement.
    I don’t believe £100,000 is remotely high enough.
    £1 million would be nice, but it would be a hard political case to make, would not unlikely to survive a change of government and would really not bring much into the exchequer because it would affect so few owners.
    I think £500,000 is a suitable compromise: providing anyone who can put money aside to invest on the basis that, eventually, it really could make that difference, but without being enough to give multi-millionaires a free ride.
    It could also be adjusted annually in line with inflation, or in line with the pension cap.

    I should declare an interest: I hold two ISAs, and would be directly affected by any of these proposals (or the Resolution Foundation proposal).

  3. Amin Mohammed says:

    I don’t agree with the Resolution Foundation proposal, or with Toby Keynes’s comment, at all. I think taxes on the rich in this country are already far too heavy.

    I cannot explain the point in a short blog comment, but wrote a detailed article on Conservative Home in 2012 asking “How much tax is enough?” It can be read at the link below.

    https://www.mohammedamin.com/Politics/How-much-tax-is-enough.html

    I also declare an interest as my wife and I hold ISAs and would be affected detrimentally by the proposals.

  4. rogerwlawson says:

    Toby seems to think that those who have achieved a poor investment performance within an ISA should be rewarded by retaining the benefit of tax relief. That’s a great disincentive.

  5. Toby Keynes says:

    Not quite.
    With my approach, all your investments, cash and other instruments within the ISA will retain their tax-free status even when the ISA’s value goes above the ceiling, and you’d still be able to reinvest any income or sale proceeds within the ISA; all you’d lose would be the ability to pump more cash into the ISA.
    Consider: if your ISA is worth more than £500,000 or £1million, the impact of not being able to pump in another £20,000 a year will be trivial compared to the impact of your ISA’s investment performance.

  6. Paul Greenwood says:

    Around 10 years ago, there were proposals, that only fell weeks before the budget, to replace for future contributions the current pension tax regime with a copy of the ISA regime, i.e. no immediate tax relief, gross roll up and no tax on benefits. In the end the lifetime ISA was a start on this project. It would be interesting to consider what the limits would be the intention was the proceeds should support a reasonable standard of living in retirement

  7. Toby Keynes says:

    Paul makes a very interesting point. As far as I’m concerned, my ISAs, my SIPP and my dealing accounts are all just different retirement pots with different tax treatments. “Pension” is just a label, which is now attached to an immensely complex, messy, perverse and expensive-to-administer tax regime. Completely revamping the tax treatment of future pension contributions would have been OK for new starters but would have made things even messier for anyone with an existing pension; revamping the tax treatment of existing pots would have been well-nigh impossible.
    Now if they’d only named the “Lifetime ISA” as “Pension ISA” instead!
    Ah, well.

  8. Ian says:

    What seems to be overlooked here is the fact that contributions are already taxed. On the demise of the owner the whole amount (contributions and income/capital gain) is then subject to IHT. Investment in a home is much the same, but there are IHT reliefs. If the proposals are followed through, I for one will spend the amount I have to withdraw overseas by having long holidays away from this left leaning mis-managed country. I’m not super wealthy and have always avoided relying on the state, whilst contributing to the welfare system through tax and NI. Enough is enough.

  9. Alan Selwood says:

    The proposal looks politically-biased to me (The ‘Robin Hood’ approach to politically-steered distribution of wealth).
    It is also yet another example of people wanting to tinker at the edges of the tax system in order to create an impression of ‘fairness’ that is too complicated and expensive to administer.
    The usual result of such tinkering is an increase in bureaucracy for less return than had been hoped.

    What would be much more appropriate in my view would be a complete rethink of the whole tax system, with a view to broad-brush simplification, with an effort to promote overall national wealth for the public in general (and not for the benefit of the political classes and their adherents).
    Given the sums involved in total, an awful lot of the tax legislation is overkill in relation to result achieved re the total tax take required to fund what is of national importance.
    So why not remove NI (merge with income tax), remove IHT, remove CGT, apply a flat rate of income tax rates, remove most thresholds (e.g. first £20,000 of income from all sources is charges at 0%). Incentivise all personal saving that increases personal involvement in their family’s financial security and reduces State involvement.
    Levy all tax by a combination of income tax and VAT in an equitable ratio between the two. Zero-rate VAT on food and medicine and charge a flat rate on everythhing else. Remove all the other taxes, as they are of minor importance.
    Taper off government funding over a couple of decades of those things that the individual could and should fund instead (healthcare, housing education, care in old age, etc).
    Typical residual involvement by government could be just those areas where it is not realistic or economical for individuals to organise and pay for suitable provision, such as defence of the realm, law enforcement, advertising standards, public health (protection against pandemics, flu, other infectious diseases, restaurant hygiene etc), road building and maintenance, enforcement of minimum housing standards, protection of the environment, enforcement of minimum quality of housing, education and health provision.
    Medical care, housing including ‘social housing’, pensions, education should be paid by the individual, and public funds should only be used in extremis for these purposes, to ensure that the public is properly educated and does not fall into destitution through no fault of their own. The government could administer or supervise funds used by the individual for these purposes (without dictating where and how they should be invested), but the taxpayer should not be the first port of call for money.

    All tax legislation should be simplified to the extent that all relevant items can be listed within 10 sheets of A4 (if it takes more, simplify the tax regime further).

  10. Roger Lawson says:

    I totally agree with Alan’s comments on the tax regime. It’s just a make work scheme for accountants and lawyers.

  11. David Crowther says:

    For many of us without the benefit of generous public sector final salary pensions, ISAs (and now, LISAs) are in fact our pensions. I have been investing in ISAs (and before them, PEPs) for over 25 tear – so a £100k limit is only £4k per year into my pension – hardly the preserve of the rich – and far too little for pension savings. I would be very happy to accept a £100k limit if it were replaced by a final salary pension.
    Can I suggest that if such a cap was implemented, them for fairness, this cap should apply to all forms of pension saving.
    I think The Resolution Foundation is simply cherry-picking “facts” to suit its political agenda.

  12. John Catt says:

    There is also the element of trust in Government promises. ISA investors were assured their investments would be free of income and capital gains tax regardless of success or failure of their investment for their life time. Surely this is no more unjust than the Government allowing tax free prizes on Premium Savings Bonds. Adjusting current contributions would be OK but hitting the £1M ISA holders would be the equivalent of taxing lottery prize winners. If Governments renege on their promises they will have difficulty in “selling” future schemes.

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