A total of £872 billion is held in Britain’s ISA accounts, with almost £100billion of that added in the last year alone. I would hazard a guess that almost every subscriber to MoneyWeek magazine has one. Within an ISA, your money is completely free of income tax and capital-gains tax, and unlike with pensions, there is flexibility over when you can take it out. ISAs have become central to the way the British save and invest. With a £20,000 annual limit, it soaks up most of the spare money people have to put aside.
Now, they are starting to come under sustained attack. In the last Budget, chancellor Rachel Reeves reduced the amount that could be put into a cash ISA to £12,000 a year as of April 2027. There are reports that the taxman wants to go further and charge a 22% levy on cash assets held within a stocks and shares ISA, and is also looking at aligning the rate with income tax, so that 40% and 45% taxpayers would have to pay extra on any cash held in their ISA.
It sounds like an administrative nightmare. It will be hard for ISA providers to work out what percentage of a fund is in cash; whether a client is a standard or higher-rate taxpayer, or whether they have used up their dividend or personal allowances for the year. Some of the smaller firms, which may also be the most innovative, may simply decide it is no longer worth the hassle and give up. But the real problem is not just all the red tape that will now be imposed on a product that was designed for its simplicity. It is also the precedent.
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The slippery slope with ISAs
The simple rule that the ISA is free of tax has now been breached and, once that taboo is broken, future chancellors can easily ramp up the tax levied on ISAs. After all, what counts as a cash holding? A money-market ETF? A bond fund? A high-yielding equity? The tax grab might start with simple cash balances, but it is not hard to see the reach getting extended, especially as clever fund managers come up with products that have all the characteristics of a savings account with a different wrapper. Perhaps only basic-rate taxpayers should be allowed relief on their entire holdings; or ISAs should be restricted to the holding of shares listed in Britain. Alternatively, perhaps there should be a £100,000 lifetime limit on contributions to an ISA, an idea already put forward by the Resolution Foundation, whose former boss, Torsten Bell, is now a Treasury minister. Or how about a special 10% income and capital-gains tax on any assets held within an ISA?
After all, the government is desperate to raise more money and is boxed in by its rash promise not to raise any of the three main taxes. That makes all the cash locked up in savings accounts a tempting target. After a few years, almost all the tax advantages may well have been stripped away.
Britain is returning to the 1970s
And yet that would be a tragedy. The ISA can be traced back to Nigel Lawson’s Personal Equity Plan first launched four decades ago. Gordon Brown put a new label on it, but it was basically the same vehicle. When it was started, it was part of the Thatcherite project to create a shareholding democracy. The theory was that if people owned shares, they would be independent of the state, it would increase the amount of capital available to British industry, and, perhaps most importantly of all, it would build support for free markets.
When industries were privatised, the shares were sold at a discount, and many people put them straight into their Pep/ISA and held onto them. If enough people had a stake in the system and were benefiting from it personally, then they were far more likely to be suspicious of higher corporate taxes or more regulations for business.
It is arguably the last surviving remnant of the Thatcher reforms of the 1980s. We no longer have a flexible labour market. Our rate of corporation tax is about average for Europe and no longer one of the lowest. Our top rate of income tax is punishingly high and kicks in at a very low level, while inheritance taxes are among the highest in the world. The trade unions are allowed to become steadily more powerful. With Great British Energy and Great British Rail, we are even renationalising major industries. The Labour government has now started to destroy the last relic of that era – and the British economy will complete its journey back to the dysfunctional 1970s.
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