Government may cut ISA limit

The amount of tax-free cash that Britons can stash in individual savings accounts could be lowered as part of the government's comprehensive spending review in two weeks’ time.

Cutting the maximum allowance, or scrapping the annual inflation-linked increases, could be proposed on October 20th to stem the billions in tax that ISAs deprive the Treasury of each year.

In fact during the 2008-9 financial year, such account holders cost the government an estimated £2.2billion that would have otherwise been levied on interest and dividends.

Despite being a substantial sum, it represents "a drop in the ocean when you consider the UK national debt stands at over £800 billion," according to Danny Cox, of Hargreaves Lansdown.

The investment adviser said that reducing the maximum savings allowance would also have "virtually no impact" on the tax take in the short term, as many investors and savers already have significant sums sheltered in ISAs.

However the government’s willingness to target savers for savings – for example the Child Trust Funds and the curtailment of tax relief on pensions– has one Labour MP suspecting that ISA are next.

If Andy Love, a member of the cross-party Treasury Select Committee, is proved right, the government would jeopardise the record savings deposits that Brits using ISAs have only just racked up.

Pointing to its fresh data, the Investment Management Association (IMA) said the boost to the ISA allowance, last October for the over-50s and from April, increased the monthly deposit of new money, on average, each month to £400m.

However take-up figures look less convincing to a government on a cost-cutting drive: research from Fidelity reportedly shows that only one in ten savers has used their full £10,200 allowance (raised from £7,200 previously).

Though when individuals who had active investments, including ISAs, were polled by the IMA, almost half said they would save even more if the government decided the annual allowances should be increased further.

"The contractor community will be waiting with baited breath to hear George Osborne's spending review on 20th October," reflected Tony Harris of independent financial advisory ContractorMoney.

"In the meantime, we urge contractors to save up to the annual limits now ahead of any changes in the ISA and pension allowances."

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