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The Chancellor, Jeremy Hunt, is being urged to drastically cut what people can hold in tax-free individual savings accounts.
A report by think tank The Resolution Foundation estimates that the government could collect around £1bn a year in taxes by limiting the total amount people in Isas could save to £100,000.
It said the policy could spend more money helping families with no savings, rather than continuing to benefit wealthy individuals through tax breaks.
The tax protector: Britons can currently save or invest up to £20,000 a year in an Isa
There are currently 1.5 million people who have saved £100,000 or more in Isas, according to the report, while there are about 750,000 families who have no savings at all.
At the moment, Brits can save or invest up to £20,000 a year in an Isa, but there is no general limit to how much a person can collect during their lifetime.
The report claims that Britain’s current savings policy favors those who already have significant wealth.
Molly Broome, an economist at the Resolution Foundation, said: ‘Britain is not a nation of savers. This lack of financial resilience has left many exposed to the cost-of-living crisis, which saw families racking up debt and falling behind on bills.
“Government incentives to save do exist, but they are not fit for purpose: they prioritize tax cuts for those with very large savings over supporting a real increase in the number of people with savings.
Our countless savings policies will cost the government £7bn next year if interest rates rise, with the lion’s share going to wealthy households.
Spending more than £2 billion on people with Isa savings of more than £100,000, when 750,000 families have no savings at all, is not what appears to be a good use of Treasury resources.
“The chancellor can address both issues in his forthcoming budget by massively expanding Help to Save for low-income families and scaling back tax-free savings for already very wealthy individuals.”
Existing policies to encourage saving include both tax credits, such as savings and ISAs, and direct aid, such as Lifetime ISAs and Savings Aid, which supplement saving with a government ‘bonus’.
Rising interest rates mean these policies are on track to cost the Treasury around £7bn a year by the end of 2023/24, in terms of lost tax revenue and direct payments to households.
The Resolution Foundation report says the Isa rules, in particular, are heavily focused on helping wealthier households.
For working-age adults, it says, nearly a third of total Isa savings are held by those in the top 10 percent of households in terms of wealth.
Difference: According to the Resolution Foundation, nearly a third of Isa’s total savings are in the hands of the 10% wealthiest families
According to the think tank, ISAS will cost the government a total of £4.3bn a year in lost tax revenue by the end of 2023/2024 as interest rates rise.
It’s a similar picture for Lifetime ISAs, which target aspiring starters or retirement savers under the age of 40.
It is estimated that around half of the £670 million in Lisa tax breaks will go to the top five wealthiest households.
Even the personal savings deduction, which offers a £1,000 tax-free allowance to base-rate taxpayers and a £500 allowance to higher-rate taxpayers, has come under scrutiny.
The report’s authors note that while savings are progressive, 41 per cent of the £1.3bn of lost tax revenue goes to the wealthiest tenth of households, reflecting their much higher level of savings.
Those with very high levels of Isa savings usually earn at least £100,000 a year, according to the Resolution Foundation report
The report warns that Britain has had the lowest overall savings levels of any G7 country in four out of five years since 1980.
This is a particular problem for low to middle income households, with half of households typically having £3,000 or less in savings per adult, while around 750,000 families have no savings at all.
This lack of savings can pose a real threat to living standards. Families in this position are 18 times more likely to report being unable to cover an unexpected expense.
Few savers: Britain has one of the worst saving records of any G7 country, the report said
Help to Save – where people can save up to £50 a month and get an extra 50 per cent from the government – is the only savings policy aimed at low-income families, as eligibility is determined by receipt.
However, usage is low with less than one in ten eligible participants using it.
The report finds that this may reflect the fact that many benefit recipients simply cannot save.
Molly Broome, an economist at the Resolution Foundation, said: ‘Britain is not a nation of savers. This lack of financial resilience has left many exposed to the cost-of-living crisis, which saw families racking up debt and falling behind on bills.
“Government incentives to save do exist, but they are not fit for purpose: they prioritize tax cuts for those with very large savings over supporting a real increase in the number of people with savings.
Our countless savings policies will cost the government £7bn next year if interest rates rise, with the lion’s share going to wealthy households.
Spending more than £2bn on people with Isa savings of more than £100,000, when 750,000 families have no savings at all, is not what appears to be a good use of Treasury resources.
“The chancellor can address both issues in his forthcoming budget by massively expanding Help to Save for low-income families and scaling back tax-free savings for already very wealthy individuals.”
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