The views expressed in this article are those of its author and not necessarily those of ShareSoc.
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.
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.
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”.
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.