As a think tank calls for a lifetime ISA cap, how much do you benefit from the savings incentive?

A child putting money in a jar.

ISAs are a vital part of effective financial planning for many people. According to official statistics, around 12 million adults deposited money in an ISA during 2020/21.

Around 66% of these accounts hold cash, while the rest are Stocks and Shares ISAs. In total, consumers added £72 billion to ISAs during the year.

Under current rules, you can add up to £20,000 to ISAs each tax year. You can place the money in a Cash ISA to earn interest, or invest through a Stocks and Shares ISA. ISAs are tax-efficient, so you won’t need to pay Income or Capital Gains Tax (CGT) on the interest or returns you receive. As a result, they can be a useful way to reduce your overall tax liability.

Now, however, a think tank is calling for changes that could make them less tax-efficient. Find out why the organisation wants to change how much you could save in an ISA and whether it’d affect your plans here.

The think tank report proposes a £100,000 cap on ISAs

While there is a limit to how much you can deposit each tax year into an ISA, there isn’t a lifetime allowance. This is what a new report is calling for.

The report from the think tank Resolution Foundation and charity abrdn Financial Fairness Trust calls on chancellor Jeremy Hunt to reduce the total amount people can tax-efficiently save or invest through an ISA to £100,000.

The report claims this would cut waste and focus the government’s savings policy on getting more people to save, rather than rewarding those that already have a significant nest egg.

The report found the wealthiest tenth of families own 29% of ISA savings.

Wealthier families are also more likely to benefit financially from using the Lifetime ISA (LISA) allowance. The LISA aims to help first-time buyers save a deposit. Each tax year, savers with a LISA can add up to £4,000 and receive a 25% government bonus. The report estimates that 47% of the £670 million of government support given through LISAs is going to the richest fifth of households.

The report also notes that ISAs are set to cost £4.3 billion each year in forgone tax revenue by the end of 2023/24. So, how do you benefit from saving or investing through an ISA?

How much do you save in tax by using an ISA?

How much tax you could be liable for if you moved your savings or investments from an ISA will depend on a range of factors, including your income and other assets.

Savings outside of an ISA may be liable for Income Tax

The combination of the Personal Savings Allowance (PSA) and ISA annual subscription limit means that most people don’t need to consider paying tax on the interest their savings earn.

The PSA is how much interest you can earn before Income Tax is due. For the 2023/24 tax year:

  • Basic-rate taxpayers have a PSA of £1,000
  • Higher-rate taxpayers have a PSA of £500
  • Additional-rate taxpayers do not have a PSA.

So, if ISA rules changed, some savers could find they need to start paying Income Tax on interest earned if they exceed the PSA or don’t benefit from it.

Investments outside of an ISA may be liable for Capital Gains Tax

Investments that aren’t held in a tax-efficient wrapper, such as an ISA or pension, could be liable for CGT. This is a tax you pay when you make a profit when you dispose of certain assets.

Each tax year, you can make a certain amount before CGT is due – this is known as the “annual exempt amount”. For the 2023/24 tax year, you can make up to £6,000 before CGT is due, but this allowance will fall to £3,000 in 2024/25.

The rate of CGT depends on which tax band the gains fall into when added on top of your other income. For 2023/24, the CGT tax rates are:

  • Standard CGT rate: 10% (18% on residential property)
  • Higher CGT rate: 20% (28% on residential property).

As a result, CGT can significantly reduce the amount you make when selling investments.

So, whether you’re saving or investing, changes to the ISA to implement a cap on the total value could mean some households see their tax bill rise.

Contact us to create a financial plan you can rely on

While the government hasn’t announced an ISA cap, you should keep in mind that things can change. It’s important that your financial plan continues to reflect current legislation.

As a financial planner, we’re here to work with you on a financial plan that suits your needs. This includes ensuring you’re up-to-date with changes and understand what they could mean for you.

Please contact us to arrange a meeting.

Please note: This blog is for general information only and does not constitute advice. The information is aimed at retail clients only.

The value of your investment can go down as well as up and you may not get back the full amount you invested. Past performance is not a reliable indicator of future performance.

This article is for information only. Please do not act based on anything you might read in this article. All contents are based on our understanding of HMRC legislation, which is subject to change.

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