Might a future government be tempted to limit Isa savings to £100,000?

The debate over whether there should be a £100,000 lifetime limit on Isa savings has flared up again this weekend.

The idea of ​​putting a limit on how much people can invest in popular tax-sheltered Isas – which could potentially raise £1 billion a year to help less affluent savers – was mooted by the Resolution Foundation earlier this year.

It led to resistance at the time, including from This is Money’s editor Lee Boyce, because Isas are a simple, well-understood and successful way of saving.

The proposal came under renewed scrutiny after the think tank’s boss, Torsten Bell, was accepted as the Labor candidate for Swansea West, and deleted a post on X on the subject.

There is no indication that Labor intends to include this as policy (the deletion suggests not), so it seems unlikely that this is in the current manifesto.

However, a future government of both parties will try to raise extra money without breaking promises not to increase key UK tax rates – income tax, national insurance and VAT.

We previously looked at how a new government might look at reducing tax relief on pensions, at least for higher earners.

Here’s a summary of what the Resolution Foundation proposed earlier this year, and finance experts William Stevens from Killik and Co and Rachael Griffin from Quilter explain how it could work in practice.

£100,000 lifetime limit on Isa savings explained

The current limit for tax-free savings in an Isa is £20,000 per year, and tens of millions of people use this to store and build their wealth through interest rates and investment growth.

Last week we revealed how a record £11.7 billion in cash was deposited from Isas in April, showing that the popularity of tax-free accounts continues to grow.

The Resolution Foundation says £20,000 is high, more than four times the average level of total savings – including current accounts and other savings products – per adult.

“It is largely people on higher incomes who benefit most from Isas, as they tend to have larger pots of such savings.” Resolution says in its January briefing on household savings.

For example, for working-age adults, around £3 of every £10 saved in Isas (29 per cent) is held by those in the top income decile and just under three-quarters (74 per cent) is held by those in the top half of the distribution of income.’

It says around 1.5 million people live in households with Isas worth more than £100,000 per adult, and most people are aged 60 and over.

‘The problem is not just who benefits from Isas, but also who doesn’t. Young people, women and those living outside southern England – all indicative of lower incomes and wealth levels – are less likely to benefit from Isaa’s tax-free savings support,” the report continued.

The Resolution Foundation says there is an endemic and long-standing problem of too many families having too little savings, and argues that more effective support could be financed by reducing the ineffective tax breaks enjoyed by the very rich.

“Policymakers tend to focus too much on increasing overall savings levels – a worthwhile goal, even if success has been limited so far – and not enough on ensuring that more households have adequate levels of savings,” adds it to it.

The think tank proposes to limit Isa amounts, possibly in the following way.

• There is currently an annual limit of £20,000 on the amount that can be added to an Isa in a given tax year, but there is no limit on the total value that can be held in Isa accounts, nor on the income.
• It would be administratively difficult to limit returns or income, so a simpler approach would be to limit the total value an individual can hold across all Isas.
• When this limit is reached, whether due to active saving, savings income or capital gains, an individual would no longer be able to add money to an Isa account.
• The additional revenue generated could be used to finance an increase in the generosity of the population Help in saving the schedule, which encourages low-income people to save and earn bonuses on their money.

The table below estimates the income that could be generated by limiting existing individuals’ Isa holdings to £100,000.

This is based on taxing returns on cash Isas as income and taxing returns on shares and stock Isas as capital gains, the Resolution Foundation explains.

Limiting Isa values ​​to £100,000 could raise £1 billion a year

How could an Isa lifetime savings limit of £100,000 work?

William Stevens, head of financial planning at Killik & Co, explains the practical consequences this can have for savers and investors.

We have strong precedent for how restrictions on tax-efficient wraps could work with the now-defunct lifetime allowance. (Read This is Money’s guide to the lifetime pension benefit)

However, consideration should be given to those who have already exceeded this amount, as retrospective taxation on those with large Isas, built up during a period when there were no limits, would likely face legal challenges.

(This) was the case with transitional protection for pension savers.

The reality of implementing a system would be complex, with quite a few questions for Isa providers and more administration required, potentially increasing costs for companies offering these systems – which would likely be passed on to investors.

Careful consideration needs to be given to the impact this could have on savers, as uncertainty surrounding the ISAS may deter individuals from using it to save and invest for their future.

A cap would add complexity to a simple product

Rachael Griffin, tax and financial planning expert at Quilter, gives her thoughts.

Isas were introduced as a means of encouraging saving and with contribution levels having been frozen in recent years, there is essentially already a cap.

By limiting the amount you can save in an Isa, particularly a stocks and shares Isa, you end up taxing the performance of funds and not really the ‘input’.

From a provider’s perspective, it would prove almost impossible to check who has exceeded the limit as you can hold multiple Isas with different providers.

A limit would increase the complexity of a simple product and lead to strange behavior where people end up switching to a portfolio that does not match their risk profile to limit the growth of the fund.

Similarly, these types of caps could put people off investing, which would be a blow to investment in the UK stock market and potentially cause problems for the proposed UK Isa.

People could instead be forced to buy more property, which may not be a good outcome as house price inflation has already priced many first-time buyers out of the market.