Could a future authorities be tempted to cap Isa financial savings at £100k?

Debate over whether there should be a lifetime cap of £100,000 on Isa savings reignited over the weekend.

The idea of placing a limit on how much people can put into popular tax-protected Isas – potentially raising £1billion a year to help less well off savers – was floated earlier this year by the Resolution Foundation.

It prompted pushback at the time, including from This is Money’s editor Lee Boyce, on the grounds Isas are a simple, well-understood and successful way to save.

The proposal came back under scrutiny after the think-tank’s boss, Torsten Bell, was adopted as a Labour candidate for Swansea West, and deleted a post made on X about the topic.

There is no indication Labour plans to take it up as a policy (the post deletion suggests not) so it seems unlikely to be in the pending manifesto.

However, a future government of either party will be looking to scrape up extra cash without breaking promises not to raise the UK’s main tax rates – income tax, National Insurance and VAT.

We have previously looked at how a new Government might take a look at cutting pension tax relief, at least for higher earners.

Here’s a recap of what the Resolution Foundation proposed earlier this year, and finance experts William Stevens of  Killik and Co and Rachael Griffin of Quilter explain how it might work in practice.

Lifetime cap of £100,000 on Isa savings explained

The current limit on tax-free saving into an Isa is £20,000 a year, and tens of millions of people use them to store and build their wealth via interest rates and investment growth.

Last week, we revealed how a record £11.7billion was piled into cash Isas in April, showing the popularity of tax-free accounts continues to grow.  

The Resolution Foundation says £20,000 is high, at over four times the median level of total savings – including current accounts and other savings products – per adult.

‘It is largely higher-income people that benefit the most from Isas, as they tend to have larger pots of such savings,’ the think-tank says in its January briefing on household savings.

‘For example, for working-age adults, around £3 in every £10 saved in Isas (29 per cent) are held by those in the top income decile and just under three quarters (74 per cent) is held by those in the top half of the income distribution.’

It says around 1.5million people live in families with Isas worth over £100,000 per adult, and they are mostly aged 60 and above.

‘The problem is not just who benefits from Isas, but also who does not. People who are young, women, and those living outside the south of England – all characteristic associated with lower incomes and wealth levels – are less likely to benefit from the tax free savings support provided by Isaa,’ it went on.

The Resolution Foundation says there is an endemic and long-standing issue of too many families having too little in savings, and contends that more effective support could be funded by reducing the ineffective tax advantages the very wealthy enjoy.

‘Policy makers have tended to focus too much on raising aggregate saving levels – a worthy goal, even if success has been limited to date – and too little on ensuring that more families have a decent level of savings,’ it adds.

The think-tank suggests capping Isa amounts, potentially in the following way.

– There is currently an annual cap of £20,000 on the amount that can be added to an Isa in any given tax year but no cap on the total value allowed to be held in Isa accounts, nor on the income.

– It would be administratively difficult to cap returns or income, so a simpler approach would be to cap the total value an individual is allowed to hold across any Isas.

– When this cap is hit, as a result of active saving, savings income or capital gains, an individual would no longer be able to add money to any Isa account.

– The additional revenue generated could be used to fund an increase in the generosity of the Help to Save scheme, which encourages people on low incomes to save, and earn bonuses on their cash.

The table below estimates the revenue that could be raised by capping existing individuals’ Isa holdings at £100,000.

This is based on taxing returns on cash Isas as income and taxing the returns on stocks and shares Isas as capital gains, explains the Resolution Foundation. 

Capping Isa values at £100,000 could raise £1bn a year

How might an Isa lifetime savings cap of £100,000 work?

William Stevens, head of financial planning at Killik & Co, explains how it could affect savers and investors in practice.

We have a strong precedent for how limits on tax-efficient wrappers might work with the now-defunct Lifetime Allowance. (Pensions lifetime allowance explained here) 

Consideration would need to be given to those who have already exceeded this amount, however, as retrospective taxation on those with large Isas built up during a period when there were no limits would likely face legal challenges.

[This] was the case with transitional protection for pension savers.

The reality of implementing a system would be complex with quite a few questions for Isa providers and more administration needed, potentially pushing up the costs for business providing them – which would likely be passed on to investors.

Careful consideration should be given to the impact this might have on savers, as uncertainty on Isas may deter individuals from using them to save and invest for their future.

A cap would add complexity to what is a simple product 

Rachael Griffin, tax and financial planning expert at Quilter, gives her take.

Isas were introduced as a means of encouraging saving and since the contribution level has been frozen for the last few years there is in essence already a cap. 

By capping the amount, you can save into an Isa, in particular a stocks and shares Isa, then you end up taxing performance of funds and not really the ‘input’. 

It would prove almost impossible to monitor who had breached the cap from a provider perspective given that you are able to hold multiple Isas across different providers. 

A cap would add complexity to what is a simple product, and produce odd behaviours where people end up moving to a portfolio at odds with their risk profile to mitigate fund growth.

Similarly, these kinds of caps might serve to put people off from investing which would be a hammer blow to investment in the UK stock market, and would potentially cause issues for the proposed UK Isa. 

People might be pushed back into buying more property instead, which may not be a good outcome given house price inflation has already priced out many first-time buyers.