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Jeremy Hunt has signalled his intent to overhaul tax-free savings and investment accounts at the Autumn Statement on November 22, and speculation continues to build about what form this might take.
Granted, there are plenty of competing priorities for the chancellor’s limited fiscal firepower, but individual savings accounts (Isas) are a mass-market tax break enjoyed by 13mn people.
Ironing out kinks in the current system wouldn’t necessarily cost that much, but it would encourage people to save and invest more for the future — plus deliver some much-needed help for first-time buyers.
Here are five ways I think he could put fuel in the Isa tank.
1. Raise the £20,000 annual Isa limit
I appreciate this request is unlikely to be granted, but it would solve a looming savings tax problem that most people are blissfully unaware of.
You may be overjoyed at being able to earn 5 or 6 per cent interest on cash savings — but an estimated 2.7mn people will have to hand some of this back to HM Revenue & Customs in the current tax year.
£8,330The amount higher-rate taxpayers can save before hitting the tax-free limit, based on a 6% interest rate
Two years ago, broker AJ Bell calculated higher rate taxpayers could have stashed away £77,000 in the top-paying savings account before exceeding their £500 personal savings allowance. Today, they’d only need savings of £8,000 to hit it, and will have to pay 40 per cent tax on any further interest.
Basic-rate taxpayers have a more generous £1,000 savings allowance, but additional-rate taxpayers get nothing at all. What’s more, the lower additional-rate threshold of £125,150 (cut from £150,000 in Hunt’s first Budget) means even more will be snared by a 45 per cent tax charge on any savings interest.
“If I’m saving but half of my interest is taken away, then maybe I won’t save,” says Victor Trokoudes, co-founder of Plum, the smart money app.
The obvious answer is saving into a cash Isa — but this could mean fewer people investing in stocks and shares Isas when the financial regulator is keen for more to do so.
Increasing the Isa limit would achieve the chancellor’s goal of making tax-free accounts more popular, and make it easier for people to transfer in their other savings accounts in one go.
Avoiding the savings tax would reduce the hassle factor for individuals and HM Revenue & Customs, which will otherwise have to collect it via self- assessment or by tweaking millions of individual PAYE tax codes.
Given its current difficulties answering the phone, this could be a wise move.
2. Kill off the Lifetime Isa
Martin Lewis, founder of the MoneySavingExpert consumer advice site, has branded the Lifetime Isa a “dead duck” unless the chancellor fixes the property price cap penalty. In 2017, I warned first-time buyers hoping to turbocharge their deposit savings that there was no promise the £450,000 price cap would rise in line with house price inflation. Had it done so, it would be around £560,000 today.
Worse, the rising number of homebuyers, who have been priced out, lose the bonus and a chunk of their own savings if they withdraw cash before age 60. HMRC statistics show just over £47mn was forfeited by young savers last year.
The complicated rules mean that none of the major banks offer the Lisa to their customers. Plus, it’s ageist — the cut-off for opening an account is age 39, only a few years older than the average first-time buyer.
As an alternative retirement savings vehicle, the Lisa appeals to young self-employed people, but the “free money” of employer workplace pension contributions and tax relief will be a better deal for most.
Should the dead duck quack its last, account holders should be given the option to transfer their money and any bonuses earned penalty free to another Isa product.
3. Bring back the Help to Buy Isa
The need to help first-time buyers is a huge election issue, and I will be flabbergasted if there is nothing in the Autumn Statement to address this.
“Most first-time buyers will have seen their borrowing power reduce by around 25 per cent since the start of 2022 due to higher stress tests on mortgage interest rates,” says Graham Sellar, head of business development at Santander Mortgages.
“At the same time, average house prices are still up over the past two years. So it’s harder to borrow enough, and harder to save enough.”
Helping more of them save towards a deposit would be less inflationary than bringing back government-backed equity loans on new build homes, for example.
The Help to Buy Isa was designed solely with this purpose in mind, so it fits the Treasury’s simplification brief. All the major banks and building societies offered it; indeed, most have legacy customers who can keep saving into them until 2029, so it would be easy to relaunch.
Deposit savers get a 25 per cent government bonus when they buy a home. If plans change, they can withdraw their savings (plus interest) without penalty.
Hunt would need to increase the property price cap of £450,000 in London and £250,000 elsewhere, and should double the monthly savings limit from £200 to £400 so the maximum bonus is comparable with the Lisa.
4. Let people pay into more than one Isa
You can pay into more than one pension in a given tax year — so why not Isas? The current rules only allow you to pay into one cash Isa, one stocks and shares Isa and one Lifetime Isa.
Around 2mn savers still have a Help to Buy Isa account, but if they’re saving into that, they can’t fund another cash Isa unless it’s with the same provider — even though it may not offer the best rate of interest.
This also limits consumer choice in the investment world. You might want to split your allowance between, say, a Vanguard stocks and shares Isa to get low prices on its range of tracker funds, and have a riskier share trading account with an app-based Isa provider. But you can’t have both.
5. Resolve the fractional shares row
Finally, tens of thousands of young UK investors will hope Hunt will do the right thing and clarify that fractional shares are permitted to be held within an Isa.
Fractionals enable investors to buy stakes in expensive US stocks such as Apple, Amazon and Tesla from just £1, rather than saving up hundreds of pounds to purchase a single share.
As I’ve argued here before, owning a stake in these mighty global brands is a powerful attraction for the next generation of investors. If they can learn about the power of tax-free investing as they do so, it’s a valuable lesson.
Whatever shape Hunt’s reforms may take, the more people who can be switched on to the benefits of tax-free saving and investing, the better.
Claer Barrett is the FT’s consumer editor and the author of ‘What They Don’t Teach You About Money’. claer.barrett@ft.com Instagram @Claerb
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