They’re Coming For Your ISA!


I was shocked to read at the weekend in this article on This is Money that the chancellor is urged to cap ISAs at £100k. Shocked but I agree in part. They do benefit the rich, not the poor. But it fills me with dread as it’s a pillar of our own financial independence.

First of all: If you don’t know what ISAs are, go to the gov.uk website and read up.

Essentially it’s a tax-free wrapper, open to everyone with a £20,000 limit a year. There’s different types (cash ISAs, JISAs, LISAs) but the key thing is that you can save money, invest it and pay no dividend or capital gains tax.

ISA ISA Baby

The news story from the DailyWail related This Is Money – so it is knee-jerk is from the Resolution Foundation report https://www.resolutionfoundation.org/publications/isa-isa-baby/. You can download the PDF for free at this link https://www.resolutionfoundation.org/app/uploads/2023/01/ISA-ISA-baby.pdf and it makes interesting reading.

In summary, it turns out that the higher your income, the more likely you are to have money to save into an ISA. Fancy that. So the tax-benefits of ISAs fall mostly to the already well-off. Far from being a tool for the masses to save and get rich, it’s nice freebie for the already wealthy.

There are still good reasons to encourage saving. The UK has a crap savings rate, concerningly low – and the slow puncture of Brexit is making it harder for us to avoid a decline in living standards, we’re already living on borrowed future income.

However, is it fair that most financial support goes to the most well-off families? And remember that the graph below doesn’t show any of the untaxed housing wealth (my own house has “gone up” by about £70,000 in 7 years. Tax that at a meagre 10% and I’d have another £1,000 tax bill a year. A preposterous idea? Then who should pay tax, people or assets? I know what I as a person would say.

Personally, I have tried to fill my ISAs as much as possible over the years. I wish I’d started earlier but I was tricked by the change in the 0% dividend tax rate that changed to 7.5% (now 8.75%) and I also cashed in my ISA for a housing deposit – probably a familiar story for readers?

However, the problem that I have with this report is that if ISAs are limited to say £100,000 – like a lifetime allowance type of thing, it pulls one of the legs of my own financial plans. You might be saving into an ISA because you can’t afford a house – and with the “average” house costing about £300,000 (which is tax less than other assets and can appreciate tax free), £100,000 isn’t that much is it?

Also, you might not have the choice between buying a house and investing in an ISA. It means some folk get to have their cake and eat it too and if you have more than £100,000 – you pick up the bakery bill. It’s not right, is it?

Another report by the Resolution Foundation

I read their recent report titled “An intergenerational audit for the UK” which was enlightening. (You can download a PDF copy of the report at this link for free)

This graph shows the share of individuals with less than one month’s income as savings. The young are broke (although, interestingly, GFF is now in the 40-49 cohort, making me an old fart). But still, of those in their 40s, more than 4 in ten have next to nothing saved away. Add on no housing equity, and you have a nation sleepwalking into old age penury!

Changes from 2010

Turns out that austerity has meant that kids are on average £1,500 worst off and pensioners are £500 better off. Seems like the old (not me) are having it too easy. Add to that the inputted rent from their houses bought on the cheap decades ago, and pensioners are earning out earning non-pensioners as their incomes rise and everyone else’s stagnates.

Wealth By Age

Pensioners have had two great advantages over the young. One is property and the other is pensions. The average family wealth per adult for a 65-74 year old puts pension wealth is £238,000. That’s 10 times the average for 20-29 year olds. Quite a sum. And they can access that wealth and pay half the rate of tax than a working age person who works for their money (25% tax-free lump sum and 20% income tax = 15% tax versus 20% income tax + 12% National insurance = 32% tax).

The disappearance of final salary pensions and other factors mean that pension savings are declining over time for younger cohorts. Something which the government (through auto-enrolment) is trying to fix but the real problem is that median incomes aren’t rising enough to cover the costs and many people (those who have no spare cash) can’t afford to save for a retirement.

Back to Housing

It turns out that the young are not only paying more of their net income on housing costs than previous cohorts, but they’ve been stung by throwing that money away on rent payments instead of putting it into home equity. The effect month by month might be small, but over time, it creates a devasting legacy of pampered pensioners and impoverished youngsters.

And Back to ISAs

ISAs are very generous – arguably the LISA shouldn’t exist. Being able to save £20,000 a year in a tax-free manner is worth a lot. Even at the 8.75% tax rate for dividends, a portfolio yielding 4% a year or £800 will save you £70 a year in dividend tax. If you invest in an ISA for say a decade and assume a 4% yield and 3% growth, you can have a nice income of over £9,000 a year. The tax on that is £827 for a lower rate tax payer or over £3,000 for a higher rate tax payer. That saving in tax only compounds over time.

Quick ISA calc showing dividends and rac (avoided)

The benefits of saving in an ISA should not be underestimated. If Financial Independence (on your own steam) is a marathon and not a sprint, ISAs can give you a boost for when life starts to get hard.

But ISAs are overly generous and the limit of £20,000 is massive. If you can save £20,000 a year, do you really need the help? Could it be better for society that the wealthier lose their tax-free privileges and that money is spent elsewhere? I would say yes. However, think back to the tax-rates that working age and pensioners are paying. Someone on £40,000 a year PAYE is paying 32% tax (plus 9% student loan anyone?) while a pension is paying only 15%. Would it not be fairer for pensioners to pay National Insurance – maybe at a reduced 5%. After all, they are the ones receiving the state pension & clogging up the NHS.

Why should people who work for their money be taxed more than those who don’t?

Going after the ISA might be low hanging fruit – easy feather to pluck from a fattened goose. But, the potential for raising billions from pensioners is there. The inter-generational disparities between young and old make not only a sound financial case (it’s easier to raise money from those who have it), but a moral case too. It’s preposterous to have pensioners paying less tax, enjoying tax free house price gains and getting the triple-locked pension while working age people pay more tax, rent their way through life and get guaranteed below-inflation pay rises.

The choice is clear for me. We need a tax system that taxes equally. But it won’t happen. Then again, it’s not like the Tories listen to the Resolution Foundation, so the good(ish) news is that your ISA might be safe for another year or two yet.

Good luck, GFF

10 Comments

    1. Oh yes, the inheritance tax liability of ISAs is worth considering….
      The alternative is a JISA which has the unfortunate condition of you giving the money away to your kid who can then access it at the worst possible time in their life – 18.

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  1. Have to agree £40k pa for a couple is really OTT – even when you start thinking about a sensible level £5-10k pppa but then you think why does it exist at.

    Perhaps the LISA is a better solution max £4K + 25% bonus (assuming they changed the penalty to 20% for withdrawing cash under the age of x tbc)

    Then you start to think of other perks the better off get regarding tax + NI – 32% v 42%. But for pension tax relief (non salary sacrifice) the rates are 20 v 40% – this seems unduly harsh , well unfair really.

    The sooner we move to a flat tax of ~37% for all income the better.

    Whilst I’m on one, why the enormous tax free allowance it was under £50 a week when I was very young (242L coding).

    Interestingly a book on UBI suggested a zero TFA but everyone gets ~ £2.5k as an allowance. Mathematically the same (for most) but it removes the cliff edges that affect our incentives and monkey brains

    Liked by 1 person

    1. Thanks for stopping by.
      The tax free allowance takes a lot of People out of tax if you are on a low income,.but if you below it you don’t get the benefit.
      UBI would simply it, make it fairer and save the admin.
      I still think that NI is a very unfair component of the tax system and when it comes to pensions it’s even worse..
      Basic rate tax plus NI is 32% tax and 20% relief
      Higher rate is 42% tax and 40% relief.
      The spectre of benefits also makes a huge impact on lower incomes, so much so that it eclipses the tax paid on incomes for millions.

      My view is that this is the system we have and it’s up to is to play it as best as possible.

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  2. OK, I’ll bite on that juicy worm… 😉

    I always thought they should increase the ISA limit to encourage more saving! 🙂

    If they did bring in some sort of limit or harvesting, that would probably be the thing that finally pushed me into early retirement. I guess I would feel like I’d been penalised for working for a living once too often. Oh, but hang on, didn’t the government want more early retirees to go back to work? 😉

    I’m currently reading Betty’s War Time Diary, and it’s interesting because one of the main themes that is drawn out of that book is how governments are great at sucking the joy out of life, and imposing all kinds of restrictions and penalties without giving back (think lockdowns while number 10 parties). I would like to see them do something for people who actually work and pay tax for a change, instead of figuring out how to squeeze even more money out of them.

    Yes, ISAs would make a nice fat, easy, juicy target, but zooming out how could the government address the issues around poor savings rate? You have to address our debt-fuelled, consumption-based, low-cost, low-skilled economy, and that’s not going to be easy at this stage. That ship has long sailed…

    I also agree that Britain is in a long, slow, steady decline (the slow puncture as you call it), but that was already happening long before Brexit. It turns out that when you build an economy based on low-cost, low-skilled labour and then switch off the main source of that labour, that doesn’t help – who’d have thunk it…

    Liked by 2 people

    1. Thanks Code Freeze.

      The drop off in the over 50s in the workforce concerns some in government, but how to get them back in? I don’t know.

      The spending more than we save problem and poor gdp growth is a consequence of our post-2008 choices.
      Growing inequality, which is what we’ve seen, obviously will be enjoyed by the benefactors – a good test of how much you enjoy London is how much you earn.
      Rampant house prices and more importantly, rental prices along with poorer employment prospects (for the many but not all) plus students loans tax make the future look hellish.
      Back to ISAs, similar schemes don’t exist in other countries. It makes it a difficult decision to leave. If so, financial planning will be required to not have to pay your fair share of tax.
      In the UK, the fair share of tax and who pays it are indispute, but I’d rather see the old and the houses pay instead of the young and the houseless.

      Liked by 1 person

  3. If you think ISAs are generous then just look at pensions. It personally costs me only 46p to pay £1 in to my pension and any income is likely to be taxed at

    I’m putting £100K in to my pension (via carry forward) this financial year to take advantage before this door closes, which no doubt it soon will.

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    1. Your £40,000 a year will see you hit your LTA faster than you can say compounding interest. Plus tax on the way out.
      So, it’s great to have – especially salary sacrifice, which I had and used as much as possible.
      But, ISAs are great as you can access your money when you like all tax free.

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      1. At 5% growth it still takes >17 years putting in £40K/yr to hit the LTA, and even when you do hit it you’re still better or at least no worse off in aggregate than you would have been paying tax up front and then going in to an ISA (provided you stick largely with drawdown).

        The ludicrous tax benefits of pensions will be long tapered over the next 17 years.

        Liked by 1 person

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