Reeves doesn’t deny plan to slash cash ISA limit

Doodledog

The question is whether people who can afford to save £40k a year should be able to do so with tax free interest, when people working and earning over £12500 are taxed.

There is no right answer to that, I know. But I think the question should be asked.

Obvious answer, in my opinion. Personal allowance must be significantly higher than currently. Additional rate at least 50%.

Each person can only put £20k pa into ISAs, not £40k. Someone saving outside an ISA can earn interest of £1k pa free of tax if they pay basic rate tax. If they are in the 40% band that allowance is halved, and at 45% all non-ISA savings interest is taxed.

Not everyone puts the full amount away Any amount under £20k can be put into an isa.

Barleyfields

Each person can only put £20k pa into ISAs, not £40k. Someone saving outside an ISA can earn interest of £1k pa free of tax if they pay basic rate tax. If they are in the 40% band that allowance is halved, and at 45% all non-ISA savings interest is taxed.

Indeed.

Thus a couple could save to the future £40k pa. I was working on the basis of a couple saving to the future in ISAs. Saving is good for a myriad of reasons.

It was merely an observation.

Doodledog

I can see why the government might want to expect people with hundreds of thousands in ISAs to pay tax on the interest. Maybe a better way would be to limit the total amount that can be held tax-free, rather than the annual amount that can be contributed?

That sounds like a good idea.

She’s more interested in getting people to invest in shares via a stocks and shares ISA rather than a cash one. It’s what the City wants. It’s nothing to do with tax on interest.

ISA’s are just one way tax can be avoided, your own residence, businesses and farm land are other ways, which has fueled house price and land inflation, most saving for the future is with pensions which are taxed.

We can expect changes to bring all these into the taxation, maybe even gifts.

Pension pots are already being brought into IHT, along with businesses and farmland. The maximum IHT relief on an estate including a home left to descendants is £1m for a couple, which doesn’t go far in many parts of the country. I fully expect the seven year rule for gifts to be significantly extended, though arguably that would be very difficult to do retrospectively. Now that Starmer has committed to defence spending of 3% of GDP we are going to see a lot of tax hikes.

Maybe changes to IHT will achieve the 'levelling up' that the Tories promised but didn't deliver? The current geographical inequality goes much further than an imbalance of unearned wealth. People in some areas can move house and release large sums of money by buying a bigger and better house, whilst others are unable to move to get work because they can't afford to buy a shed, despite having worked every bit as hard (doing the same jobs) as people in the expensive areas.

This translates into more investment going to the expensive areas, and the cycle continues. Caps on social care costs would make things even worse, as the mooted figures would wipe out estates in cheaper areas but leave significant sums where house prices are high. If IHT were structured such that the inequality isn't passed down the generations (allowing heirs to pay high prices in their turn, and locking out those who inherit much smaller amounts) prices might level out a bit, and we might have a less divided society.

Barleyfields

Pension pots are already being brought into IHT, along with businesses and farmland. The maximum IHT relief on an estate including a home left to descendants is £1m for a couple, which doesn’t go far in many parts of the country. I fully expect the seven year rule for gifts to be significantly extended, though arguably that would be very difficult to do retrospectively. Now that Starmer has committed to defence spending of 3% of GDP we are going to see a lot of tax hikes.

And there lies the problem. On one thread we demand more spending on defence, on another we face the problems of paying for it.

I live in an expensive area. It receives very little investment from the government, national or local. People who are retired or can wfh aspire to move here because of its unspoiled, rural nature. There are of course downsides, no local work, hospitals or other facilities which others take for granted and no public transport. We take very little from the state but our estates will be heavily taxed.

Which is fair enough in my opinion Barleyfields. There’s an interesting thread on Mumsnet at the moment where the generation below us are talking about the challenges of buying a house if they live in the south east or other expensive parts of the country, and the burden of renting in retirement.
People who can afford to live in expensive areas make that choice, and shouldn’t expect to pass their good fortune on to their children when they die. I’m more in favour of using savings in helping them to buy their own homes when they are young enough to have the prospect of full ownership by the time they retire, rather than leaving them more when I die.

Casdon

mum2three

Why is she targeting old people? It all sounds rather spiteful and deliberate. Has she had a bad experience with older people? Was she left out of someone's will perhaps?

I don’t follow your logic there, older people have generally already accumulated their savings when they were working, and no longer have new income to invest, so surely it’s working people who are saving into ISA’s?

I'm spending my savings (not frivolously should add) but need to keep enough on one side in case I need a hip or knee operation as I can't wait another five years in pain as I did last time waiting for the NHS to operate.
So the one ISA I have is earmarked for that.

Again she seems to be targeting ordinary people and not the extremely wealthy.

Why? Is this something she is frightened of tackling or is there another reason?

We’ll have to wait to see what exactly the proposal is Allira, I think it’s hard to make any meaningful comment about who will be impacted most until we know exactly what is proposed, given there could be alternative schemes or offsetting schemes alongside the ISA potential changes. I’ll be as critical as anybody else if the average low income saver is worse off as a result.

If this happens then what will happen to existing ISAs?

We live, fortunately, in a society that offers welfare and NHS. The alternative is unthinkable. That means the well off pay more. And many who don't right now need services can be hit with serious medical conditions that may cost a great deal, or fall on hard times.

I doubt that the rumoured changes would affect low income savers Casdon.

Casdon

We’ll have to wait to see what exactly the proposal is Allira, I think it’s hard to make any meaningful comment about who will be impacted most until we know exactly what is proposed, given there could be alternative schemes or offsetting schemes alongside the ISA potential changes. I’ll be as critical as anybody else if the average low income saver is worse off as a result.

Agreed: and its still all theoretical!

Allira

If this happens then what will happen to existing ISAs?

It’s unlikely that any changes would be made to existing ISAs, other than limiting the amount which can, from a given date, be invested in the cash type.

I can understand that she wants to get the economy moving in the right direction but the changes she has made so far and, if this rumour is substantiated, seem to be tinkering around the edges and just antagonising ordinary people.
Those who may have voted for Labour last time but never will again.
Foolish. She is a liability.

As has been said over and over, these are rumours. Like bus pass withdrawal, prescription charges and so on. At this stage we don't even know if it will happen, much less what will happen to existing savings (my guess is that they will be left alone, but who knows).

If changes to ISAs are made, 'ordinary people' don't save £20k a year per person. If those who can afford to do that are taxed on the interest, that doesn't sound outrageous to me. Yes, some of those people will be antagonised, just as some of the better off were furious at losing £200 WFP, but so be it. Pretending that the concern is for the small saver will sound as hollow as the sudden worry about benefits for pensioners.

Allira

Again she seems to be targeting ordinary people and not the extremely wealthy.

Why? Is this something she is frightened of tackling or is there another reason?

Agree. She listens to wealthy people's concerns, e.g. "the non dom community ". She does not listen to the concerns of families of more than two small children or to eldeley women. But then she is not going to be an MP forever .

Casdon

Which is fair enough in my opinion Barleyfields. There’s an interesting thread on Mumsnet at the moment where the generation below us are talking about the challenges of buying a house if they live in the south east or other expensive parts of the country, and the burden of renting in retirement.
People who can afford to live in expensive areas make that choice, and shouldn’t expect to pass their good fortune on to their children when they die. I’m more in favour of using savings in helping them to buy their own homes when they are young enough to have the prospect of full ownership by the time they retire, rather than leaving them more when I die.

People who live in the 'expensive' areas don't necessarily "make that choice", they are born and bred here. We didn't move here and it's not passing on 'good fortune' to our children to enable them to live in the area where they have support groups of family and friends.
You may be fortunate enough to live in a cheaper area in Wales and can keep you family near by. Why should our children move hundreds of miles away when by inheriting from us, they could stay in the area they know and work. Not every parent has savings to help them buy their own homes as you suggest.
You obviously believe that everyone who lives in the South East is wealthy which is not the case. The majority struggle more than the rest of the country to buy a property if they ever can, and moving away isn't always a practical solution

Doodledog

As has been said over and over, these are rumours. Like bus pass withdrawal, prescription charges and so on. At this stage we don't even know if it will happen, much less what will happen to existing savings (my guess is that they will be left alone, but who knows).

If changes to ISAs are made, 'ordinary people' don't save £20k a year per person. If those who can afford to do that are taxed on the interest, that doesn't sound outrageous to me. Yes, some of those people will be antagonised, just as some of the better off were furious at losing £200 WFP, but so be it. Pretending that the concern is for the small saver will sound as hollow as the sudden worry about benefits for pensioners.

This A J Bell ISA summary from April 2024, based on HMRC data published June 2023 for total values and subscriptions until 2021/22, shows 456 billon was held in stocks and shares ISAs compared to 285 billion in cash ISAs.

www.ajbell.co.uk/articles/investmentarticles/274423/isas-turn-25-who-holds-them-and-how-much-have-they-got

But government figures for the following year show a change … the share of accounts subscribed to in cash has risen to 63.2%, a 2.5% growth from 2021 to 2022. Meanwhile, the number subscribing to stocks and shares ISAs decreased by around 126,000.

www.gov.uk/government/statistics/annual-savings-statistics-2024/commentary-for-annual-savings-statistics-september-2024

The reasons are obvious. Following the 2008 crash, we’d had 14 years of neglible interest on cash savings whereas the stock market had gradually recovered. But the 2022 cost of living crisis saw bank rates rise and much improved rates for cash savers perhaps needing a guaranteed reguular cash return to meet soaring bills rather than unreliable dividends and slow capital gains.

Someone who has invested the maximum in cash ISAs since they were introduced in 2000 (and many may have done) would have amassed a stack of £261,520 (a couple £523,040). It’s easy to get a 5% return. Those stacks would now yield a tax free income of £13,076 pa or £26,152 pa for a couple. It’s far too generous and needs to change.