The Chancellor has been warned against making a tax raid on the nation’s savers in the October budget.
Finance experts are concerned that the Chancellor could bring down the annual cap on how much people can save in Individual Savings Accounts from the current figure of £20,000.
Separately, there are also fears that Rachel Reeves could impose a maximum cap on how much people can hold in an ISA free of having to pay tax.
Analysis of data published by the Bank of England showed that savers hold £375 billion in individual savings accounts, the highest level since the accounts were launched in 1999. In the past year alone ISA deposits have climbed 17 per cent, or £54 billion, from £321 billion, with monthly inflows reaching a record of £11.7 billion in April partly due to the tax year deadline falling in the month.
Much of this cash is invested in UK businesses to support their growth, while it also provides a nest egg to help people enjoy a comfortable retirement or support adult children.
Ashley Webb, UK economist at Capital Economics, a consultancy, warned: “While reducing the tax-free allowance on Isas would raise revenue for the Treasury, it won’t help lift the UK’s low level of investment.
“Investment in the UK is five percentage points of GDP lower than in other G7 economies, and part of that is due to the UK’s low saving rate.”
Tomasz Wieladek, chief European economist at T Rowe Price, the investment firm, told the Times: “The UK doesn’t save enough as a country. That is one of the reasons behind weak investment. Given their historical low propensity to save, British savers need all the incentives to save they can get.”
ISAs are savings accounts that provide users with tax reliefs. There are several iterations of these products, with the most common vehicles being cash ISAs and stocks-and-shares ISAs, the latter of which allow people to invest in financial securities.
Monthly inflows into these tax-saving accounts have surged this year, in part due to the Bank of England having increased interest rates to a 16-year high of 5.25 percent.
General saving rates across the economy have increased sharply since the Covid-19 crisis, with the Office for National Statistics estimating that households set aside about 10p in every £1, up from about 5p before the pandemic.
Goldman Sachs, the US investment bank, said greater propensity to save may be driven by “scarring effects from the pandemic”.
Alarming data from the Bank of England shows that over £1 trillion is sitting in savings accounts with an interest rate of around 2 percent.
Finance industry experts argue there is a desperate need to encourage people to invest more of this through ISAs, both to help the UK economy and personal finances, well below the base rate of 5 per cent. Consequently, any move by Rachel Reeves to reduce the tax benefits of ISAs will only have a negative effect.
The tax-free ISA contribution cap has only ever been increased, with the intention of motivating people to save and invest. Reeves, however, could limit these reliefs, which cost £6.7 billion last year, according to the Resolution Foundation, an economic think tank.
Its researchers have previously suggested imposing a lifetime tax-free cap of £100,000 on ISAs to generate revenue to be spent on the government’s Help to Save initiative, a policy designed to encourage low incomes families to save more.
