‘Cap tax-free ISA savings at £100k’, leading think tank suggests
Britain has struggled to save for decades, with it having the lowest saving rate of any G7 country in four out of every five years since 1980.
While successive Governments have recognised the savings gap with a number of incentives and tax reliefs, the Resolution Foundation said they are “not fit for purpose”.
The report authors noted: “While intended to encourage more people to save, all of these policies’ main impact is to provide support to many people who were likely to be saving money anyway.”
It said the rich have pocketed the lion’s share of savings at a cost of £7bn to the Exchequer, while 750,000 of the low- and middle-income households have no savings at all.
As part of its ISA ISA Baby report published today in partnership with abrdn Financial Fairness Trust, it looked at the various savings schemes available to Brits, the tax hit to the Exchequer and suggestions for improvement, such as setting a £100,000 limit for tax-free ISA cash, as well as auto-enrolling benefit claimants into the Help to Save scheme.
Personal Savings Allowance
Savings allowances are progressive, with basic rate taxpayers able to earn £1,000 in saving interest (£500 for higher earners) under the Personal Savings Allowance.
However, 41% of the £1.3bn of foregone tax revenue goes to the richest tenth of households “reflecting their far higher levels of saving”.
Individual Savings Accounts (ISAs)
ISAs are set to cost the Exchequer £4.3bn a year in foregone tax by the end of 2023/24 as interest rates rise.
The think tank said ISAs are “heavily skewed towards richer households” as close to a third of total ISA savings are owned by those in the richest tenth of families.
Lifetime ISAs (LISAs)
LISAs offer a 25% bonus on savings and they’re targeted at potential first-time buyers under the age of 40.
Resolution Foundation said close to half of the £670m of government support is estimated to be going to the richest fifth of households.
Help to Save
Under the Help to Save scheme, eligible benefit recipients can save up to £50 a month where they receive a 50% top-up from the Government.
It is the only savings policy targeted at low-income families (at a cost of £43m) but take-up is low, with under one in 10 eligible using it.
The think tank said this may be because many benefit recipients are simply unable to save, but with 92% of monthly Help to Save deposits at the maximum value of £50, “people who do engage are clearly keen to save as much as possible”.
‘Overhaul of Britain’s savings policies required’
The reports suggests that taken together, the richest tenth of households are set to gain just under £800 on average from these policies next year, around 20 times the gains received by the poorest tenth of households (£38). The average household is expected to gain around £250.
According to the report, ahead of the Chancellor’s March Budget, he should consider “overhauling Britain’s savings policies” to cut waste and focus on getting more people saving rather than rewarding those who already hold significant savings.
It suggested Help to Save should be expanded by auto-enrolling benefit claimants as well as doubling the monthly cap to £100. Further, these savings should be excluded from Universal Credit rules.
Further, ISAs should have a tax-free ceiling of £100,000, “reflecting the very poor use of resources involved in offering tax relief to 1.5 million people with over £100,000 of savings in ISAs alone”.
They suggested this policy could raise around £1bn per year by the end of 2023/24 “and allow scarce resources to be focused on the around 750,000 families with no savings at all”.
‘Savings incentives exist but aren’t fit for purpose’
Molly Broome, economist at the Resolution Foundation, said: “Britain is not a nation of savers. This lack of financial resilience has left many exposed during the cost-of-living crisis, with families having to build up debts and fall behind on bills.
“Government incentives to save do exist but are not fit for purpose – prioritising tax reliefs for those with very large amounts of savings over supporting real increases in the numbers of people with savings.
“Our myriad of savings policies are set to cost the Government £7bn next year as interest rate rise, with the lion’s share going to rich households. Spending over £2bn on those with ISA savings of over £100,000, while 750,000 families have no savings at all, is not what a good use of Treasury resources looks like.
“The Chancellor can address both problems in his upcoming Budget by massively expanding Help to Save for low-income families, and scaling back tax-free savings for already very-rich individuals.”
Mubin Haq, chief executive at the abrdn Financial Fairness Trust, added: “It’s essential that help is better targeted to those on lower incomes if we are to provide the safety buffer so many need.”