Concerns have emerged regarding Rachel Reeves and the possible implications of reducing tax reliefs on Individual Savings Accounts (Isas), as this could hinder essential investment growth.
The recent increase in Isa deposits to unprecedented levels might prompt the Chancellor to consider lowering the annual tax-free allowance of £20,000 in the upcoming budget scheduled for October 30.
According to the latest data from the Bank of England, savers currently hold £375 billion in individual savings accounts, marking the highest amount since the introduction of Isas in 1999. Over the past year, Isa deposits have surged by 17 percent—or £54 billion—up from £321 billion, with an exceptional monthly influx of £11.7 billion recorded in April, influenced by the impending tax year deadline.
Ashley Webb, an economist at Capital Economics, noted, “While decreasing the tax-free allowance on Isas would generate additional revenue for the Treasury, it would not contribute to enhancing the UK’s currently low investment rates.”
He emphasized that “Investment in the UK trails five percentage points of GDP compared to other G7 countries, partially attributed to the nation’s insufficient saving rate.”
Tomasz Wieladek, chief European economist at T Rowe Price, echoed this sentiment, stating, “The UK lacks adequate savings, which is a contributing factor to weak investments. Given that the British public has historically demonstrated a low saving tendency, it is crucial to provide them with maximum incentives to save.”
Isas are a type of savings account that benefit users with tax exemptions. They come in various forms, with cash Isas and stocks-and-shares Isas being the most prevalent, allowing individuals to invest in a range of financial products.
A notable surge in monthly deposits for these tax-advantaged accounts has been observed this year, largely due to the Bank of England raising interest rates to a 16-year high of 5.25 percent.
Philip Shaw, chief UK economist at Investec, remarked, “The sharp rise in deposits can be primarily attributed to significantly elevated interest rates.”
Webb also pointed out that the high interest rates have given households stronger motivation to maximize their annual Isa allowance.
Overall saving rates across the economy have seen a significant increase since the Covid-19 pandemic, with the Office for National Statistics estimating that households now save roughly 10 pence for every £1, compared to about 5 pence prior to the pandemic. Goldman Sachs indicated that this increased saving inclination might be influenced by “scarring effects from the pandemic.”
Further data from the Bank of England revealed that over £1 trillion is currently held in savings accounts that offer around 2 percent interest, significantly under the base rate of 5 percent.
The tax-free contribution limit for Isas has historically only been raised, aimed at encouraging individuals to save and invest. However, Reeves could potentially modify these tax benefits, which amounted to a cost of £6.7 billion last year, based on findings from the Resolution Foundation, an economic think tank.
Researchers from the Resolution Foundation have suggested implementing a lifetime tax-free limit of £100,000 on Isas to generate funds for the government’s Help to Save initiative, aimed at promoting savings among low-income families.
In recent developments, Reeves has abandoned the previous Conservative administration’s plans for a “British Isa,” which was intended as an investment tool to divert capital towards UK stocks.
The Treasury has stated, “We do not comment on speculations surrounding tax changes outside of official fiscal announcements.”