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Diminishing returns

09 September 2016

HMRC figures show that many savers are still at risk of wasting the tax benefits of their ISA allowance.

There is no doubt that ISAs have been a big success in helping foster the UK’s savings habit. A new report from HMRC¹ reveals that the market value of all ISA holdings is now around £518 billion, a testament to the popularity of the scheme, which is estimated to have cost the Exchequer £2.6 billion in tax relief last tax year.

Encouraged by the government’s move to raise the annual ISA allowance by nearly 50% over the last five years, the average subscription in the 2015/16 tax year rose to a record high of £6,338. Overall, around £80 billion was subscribed to ISAs last year, an increase of £1 billion on 2014/15.

Yet the figures also reveal that the majority of ISA savers are not making the most of the long-term tax-saving and investment opportunities on offer. Overall, only 9% of individuals maximised their allowance, a figure that rises to 31% for those with income of £100,000–£149,999.

In the 2014/15 tax year, after the limit was removed on how much of the allowance could be deposited in cash, subscriptions went up by £20 billion. Of the total invested last year, 80% was subscribed into Cash ISAs, continuing a trend that has remained broadly static for a number of years. Overall, 52% of ISA funds are held in cash, despite many savings accounts now registering all-time low rates of interest.

The HMRC report shows a stronger preference for Stocks & Shares ISAs over Cash ISAs among higher income groups, whilst the opposite is true for those in the lower income brackets.

Game changers?

But are these trends likely to change? The 2016-17 tax year has heralded the introduction of the new Personal Savings Allowance and yet more cuts to savings rates following the Bank of England’s decision to halve the base rate in August. Moneyfacts reported last month that the average Cash ISA rate had fallen below 1%, and there are warnings of further cuts if the Bank of England reduces the base rate again.

The Personal Savings Allowance enables every basic rate taxpayer who saves into a regular savings account, current account or fixed-rate bond to pay no tax on the first £1,000 of interest. For higher rate taxpayers, the first £500 of interest will be tax-free. At the current average interest rate², a basic rate taxpayer could hold more than £204,000 in a standard instant access savings account, and receive all the interest tax-free.

Faced with the prospect of a ‘lower for longer’ environment for interest rates and investment returns, it remains to be seen whether savers will take advantage of the opportunity to invest their annual ISA allowance in assets with greater long-term income and capital growth potential.

¹ HMRC, August 2016

² Moneyfacts, 31 August 2016


The value of an ISA with St. James’s Place will be directly linked to the performance of the funds selected and may fall as well as rise. You may get back less than was invested. An investment in a Stocks & Shares ISA will not provide the same security of capital associated with a Cash ISA. The favourable tax treatment of ISAs may not be maintained in the future and is subject to changes in legislation.

Some of the products and investment structures documented within this article will not be available to our clients in Asia. For information on the funds that are available please get in touch.


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