The case against capping ISAs
The Chancellor has been understandably guarded about what might feature in her Autumn 2025 Budget, if only for fear of facing an endless succession of questions on the subject until then. However, the lack of certainty over the scale of the potential tax rises required is leading some taxpayers to fear the worst.
As was the case last year, advisors are facing questions from clients about whether they should take action now in relation to their assets, investments and pensions. The appropriate answer for many people is often to hold tight and avoid a potentially impulsive mistake.
As speculation builds, the reported role of Torsten Bell in the preparations for the budget within the Treasury is inevitably leading some to conclude that ideas previously put forward by the Resolution Foundation, of which Mr Bell was formerly Chief Executive, may shortly represent government policy. One previous policy proposal that is causing some investors concern is the idea of a £100k cap being placed on individual savings accounts (ISAs), with amounts in excess of this being subject to tax.
This rumour has its roots in a paper published by the Resolution Foundation in 2023, in which it was mooted that a cap could be placed on the total amount held in an ISA and that taxing returns on ISA holdings over £100k could generate around £1bn a year. Part of the rationale put forward for this is that a significant proportion of the tax benefit provided by ISAs is enjoyed by those who are already wealthy.
On the face of it, capping ISAs looks like a measure that could tempt a Chancellor facing a challenging job to balance the country’s books. There are some good reasons why investors should not panic though.
The first reason is driven by the wider economic picture and make up of ISA pots. Latest statistics highlight that the vast majority of funds deposited in ISAs go in cash ISAs, over £41bn, rather than stocks and shares ISAs, around £28bn.
The restriction of the tax relief on ISAs could potentially contribute to this gap widening further, as some investors decide to cash in on their investments, or simply retreat from the risks presented by stocks and shares. That would appear to be contrary to the reported objective of the Treasury for more to be held in stocks and shares ISAs to help drive the economy, which led to speculation earlier in the year that the contribution limits for cash ISAs would be reduced.
The second reason is more practical, as it’s not immediately obvious how ISA returns over a certain threshold could be taxed. A simple route, acknowledged by the Resolution Foundation in its paper, is that further contributions to an ISA would not be allowed once the value of an ISA exceeds the desired threshold. It would be much more difficult to effectively place a cap on existing large ISAs. In a similar way to lifetime limits placed on pensions in the past, there would likely be some need to ‘grandfather’ larger ISA pots, rather than the measure be retroactive.
Rather than unlock taxes on wealth that has already been established, a £100k cap on ISAs might simply represent another barrier for younger generations looking to build their savings. Many may use ISAs and lifetime ISAs to get on the property ladder and save towards retirement. The capping of tax-free returns could make that journey an even longer one.