Potential plans to reduce the cash ISA allowance may backfire as there is little appetite to transfer funds to a stocks and shares options as the risk is too high.
With the Budget finally just days away, concerns are growing about Rachel Reeves halving the current £20,000 tax free cash ISA threshold, in a bid to persuade savers to invest in the stock market instead, part of her hopes to stimulate some growth in the flat economy.
Months ago the Treasury confirmed that officials had been tasked by the chancellor to review the whole ISA landscape, with the likelihood of shifting the allowances around to deter people from just parking their money in safe savings pots, and a minister had been put in charge of the work.
At a Treasury Committee hearing in April, the chancellor herself told MPs reform of ISAs would go ahead, but did not set out a precise timetable. 'We're also looking at making sure that the ISA system works well for savers, a bit like what we are trying to do on pensions, we are trying to do for ISAs,' Reeves said.
But support for such a move seems thin on the ground.
Research found the majority of savers are loathe to move their money to stocks and shares ISAs, preferring to use regular access savings accounts even though they would incur tax on their interest above their particular thresholds depending on whether they are basic or high rate taxpayers.
Two-thirds said they would not switch to a stocks and shares ISA, while only a fifth of respondents said they would divert their remaining ISA allowance into a stocks and shares ISA. For the overwhelming majority, the tax-free interest was their primary reason for using cash ISAs.
93% cited tax-free interest as the primary reason for choosing a cash ISA while only 1% of respondents supported a reduction in the £20,000 threshold. Many rather optimistically actually wanted the £20,000 limit raised, even though the average annual savings made into an ISA are only around £3,000.
The vast majority of cash ISA savers are reluctant to expose their money to the risks associated with equities, despite the potential tax implications. Ultimately, it demonstrates that if the cash ISA threshold is reduced in the upcoming Budget, it is likely to there will be an increase in savers paying more tax on their savings interest. Perhaps that is also the chancellor's intention.
Peter Nichols – Tax Director BFN Accounts & Tax http://www.bfnaccounts.com