The Government’s flagship policy to promote saving is expected to cost taxpayers £6.7billion in 2023-24 with “vastly” more tax relief going to those on higher incomes, Resolution Foundation analysis shows.
Tax relief offered through ISAs is expected to rise by more than a third from the £4.9bn cost in 2022-23, the think tank says, citing HMRC figures.
The Resolution Foundation analysis, in partnership with abrdn Financial Fairness Trust, was published on Saturday (April 6) to coincide with the beginning of the new ISA year. From today, savers can put by £20,000 over the next year completely tax free.
It finds ISAs are poorly targeted, with “vastly” more tax-relief given to those on higher incomes because they are more likely to have both an ISA and substantial ISA savings.
The Resolution Foundation briefing states that from 2018-20, one-in-two (54 percent) working-age families in the top 10 percent of the income distribution had an ISA. This compares to less than one-in-five (18 percent) in the bottom 10 percent.
Almost half (48 percent) of ISA holders with incomes above £150,000 had ISA savings exceeding £50,000. The vast majority (65 percent) of ISA holders with incomes less than £10,000 had savings of less than £5,000 in their ISA, the Resolution Foundation notes.
It also says ISAs are “ineffective” at raising long-term saving, pointing too increases in the ISA allowance between 2013-14 and 2014-15 having “no noticeable impact” on aggregate household saving.
The think tank says that despite this, the Government is “doubling down” on its existing approach to boosting savings by announcing its plan to introduce a UK ISA. This would offer an extra £5,000 of tax-free savings to people investing in UK-based assets.
This extra tax-free allowance will only benefit those that have more than £20,000 to save, according to the Resolution Foundation.
Resolution Foundation economist Molly Broome said: “The Government’s flagship UK ISA policy, designed to promote saving, may be well-intentioned, but it disregards the fact that ISAs are expensive, poorly targeted and unlikely to increase long-term saving.
“With higher-income families significantly more likely to have savings in an ISA than those in low-income households, and with past increases on ISA limits shown to have no noticeable impact on aggregate household saving, it is clear that simply increasing the amount people are able to put away tax-free isn’t the answer to the UK’s low savings problem.
“Instead, if the Government wants to get serious about helping people save, the emphasis of policy needs to be on behavioural interventions rather than financial incentives.”
The Resolution Foundation says in 2020-21, only seven percent of ISA holders (1.6 million people) maxed out their annual ISA allowance. It adds the new UK ISA is “unlikely to shift the dial” on aggregate household saving given the “relatively small amount” already saving £20,000 a year.
There were more than 22 million ISA holders in 2020-21, meaning about 42 percent of adults in the UK had an ISA.
ISAs work by offering a tax-free method of saving or investing money, with individuals exempt from paying tax on any income or capital gains they receive from their ISA savings and investments.
Millions take advantage of this tax relief each year, with £67bn deposited into 12 million adult ISAs in 2021-22 alone.
But the Resolution Foundation describes the cost to the exchequer from foregone tax revenue on ISAs as large. The increase in cost to HMRC is “largely” the result of higher interest rates boosting returns on savings.
However, policy decisions such as decreasing the dividend allowance from £2,000 to £1,000 and capital gains tax-free allowance from £12,300 to £6,000 has also boosted the amount deposited into ISAs and the cost of tax reliefs provided through ISAs, according to the Resolution Foundation.
It says ISA savings will remain a costly tax-break for the Treasury in the foreseeable future, with market pricing suggesting Bank Rate will stay above three percent until at least 2028-29.
Mubin Haq, Chief Executive of abrdn Financial Fairness Trust, said: “Savings are essential to weathering economic shocks, but too many of us have too little to fall back on, especially those on lower incomes.
“Government support to boost savings is not geared towards helping those most in need and the public cost of ISAs is set to rise by more than a third from the previous year.
“It is essential help is better targeted if we are to provide the safety net so many people need to cope with the rainy days we regularly face. This requires a radical rethink which could deliver the financial security millions need.”
