Is there an ISA boost on the way?

Jeremy Hunt is reportedly planning large-scale ISA reforms, which include merging cash and stocks and shares products, and introducing an ISA for UK investments. We have all the details.

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(Image credit: Getty Images)

The chancellor is reportedly planning a radical shake-up of ISAs to encourage people to take advantage of the tax-free products, and boost investment in UK companies.

According to a report in the Financial Times, Jeremy Hunt is considering introducing an additional tax-free allowance for investing in UK companies. This means that on top of the £20,000 annual ISA limit, there could be an extra allowance for holding British shares.

Treasury officials have also met investment industry bosses to discuss merging stocks and shares ISAs with cash ISAs.

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The shake-up aims to simplify the ISA regime and boost the UK stock market.

Treasury insiders said ministers want to use the Autumn Statement, which will take place on 22 November, to increase share ownership and encourage more ISA savings.

The Treasury told MoneyWeek: “HM Treasury is receptive to ideas of how we can make ISAs more attractive to encourage people to develop a savings habit and to invest in a way that works for them.”

It is understood that any ISA reforms will be announced in the chancellor’s Autumn Statement, and not before.

Does the ISA regime need simplifying?

There are six types of ISA: cash, stocks and shares, junior, lifetime, help to buy, and innovative finance. Lifetime ISAs can be opened by those under 40, and have been criticised for being too complex. Innovative finance ISAs allow investment in peer-to-peer loans but have had very low take-up. Help to buy ISAs are closed to new applicants, but customers who already have one can pay into it until November 2029. 

Cash ISAs are the most popular vehicles, with the majority of savers’ money funnelled into those. According to the most recent official statistics, savers paid £7,139,000 into cash ISAs in 2020-21, while £3,934,000 was contributed to stocks and shares ISAs. A total of £662,000 was paid into lifetime ISAs, and just £17,000 was paid into innovative finance products.

Sarah Coles, head of personal finance at the wealth manager Hargreaves Lansdown, says some simplification would be welcome, but the Treasury’s reported plans “risk over-complicating a well-established system”.

She comments: “One proposed change that initially looks like a way to make life more straightforward would, in reality, over-complicate things for savers. In merging cash and stocks and shares ISAs, it would need to be ensured that cash ISA customers would not get communications on investment issues, which could be off-putting and confusing for people who only want to keep their money in cash.”

Coles says creating a separate ISA allowance for UK investments “adds a needless extra layer of complication”.  

Richard Murphy, an accounting professor, writes in a Tax Research blog that Hunt’s ISA suggestions “make no sense” as they would “increase inequality by extending tax reliefs for the well-off”.

However, the investment platform AJ Bell is supportive of radical ISA simplification, arguing that the various versions of ISAs “risk undermining a product that has proven popular with millions of investors”.

Tom Selby, head of retirement policy at AJ Bell, comments: “Combining the best features of the current landscape in a single ‘One ISA’ product would make it much easier for people to engage with the world of investing.

“Without simplification, there is a danger the battle for engagement will be won by people flogging high-risk, unregulated investments that all-too-often end up being inappropriate or complete scams.”

But he is sceptical of linking an increase in the ISA allowance to an allocation to UK-based investments, saying: “There is a danger in encouraging investing in a specific country that the benefits of diversification will be undermined.”

Increasing the ISA allowance

One potential reform that experts would like to see is boosting the £20,000 ISA limit for everyone - rather than only investors who allocate to UK shares.

“Given the ISA allowance has been frozen at its current level of £20,000 since 2017/18, there is an argument that savers are long overdue a rise,” notes Selby. 

According to Coles, increasing the allowance would be a real boon for investors who have maxed out their allowances and now face harsh tax penalties on investments held outside an ISA. 

“An increase in the ISA allowance would be a shot in the arm for investors battered by cuts in the allowances for dividend tax and capital gains tax. It would release pent-up demand and allow more money to naturally flow into UK stocks and shares,” says Coles.

“Increasing the existing allowance by £10,000 to £30,000 could mean capital gains savings of £35,490 over 20 years for a higher-rate taxpayer investing in stocks and shares.”

How else could ISAs be reformed?

Coles says the government should think seriously about making a couple of small tweaks to ISAs, which would make them fairer and simpler. First, it should be possible to pay into as many ISAs as you like each tax year provided you stay within the overall £20,000 ISA limit. This change would make it easier to open, subscribe and transfer ISAs, and remove a layer of needless complexity, according to Coles.

Changing the lifetime ISA should also be a high priority for Hunt. Coles explains: “Allowing the £4,000 lifetime ISA allowance to be additional to the £20,000 ISA limit would help separate these products, and boost incentives to invest. 

“We also want to see the lifetime ISA penalty cut from 25% to 20%. The 25% penalty currently not only claws back the government bonus to save, but also applies an additional 6.25% penalty based on the amount invested.”

Ruth Emery
Contributing editor

Ruth is an award-winning financial journalist with more than 15 years' experience of working on national newspapers, websites and specialist magazines.

She is passionate about helping people feel more confident about their finances. She was previously editor of Times Money Mentor, and prior to that was deputy Money editor at The Sunday Times. 

A multi-award winning journalist, Ruth started her career on a pensions magazine at the FT Group, and has also worked at Money Observer and Money Advice Service. 

Outside of work, she is a mum to two young children, while also serving as a magistrate and an NHS volunteer.