Tax free savings - Past, present and future

As neither vehicle has been available for new funds for more than 20 years the precise detail of each is somewhat redundant. However, those savers who did make use of these early iterations of the ISA will have been able to make substantial funding into tax-free vehicles as well as enjoying anywhere up to 34 years of growth on their savings! 

This is highlighted by the increasing number of ‘ISA millionaires’ in the UK who have managed to save at least £1m in ISAs with the majority having started this before ISAs even existed. While there have been several formats and even more changes to restrictions, rules and funding limits, those that navigated these will have benefited hugely. 

In 2013 the option to hold shares listed on the Alternative Investment Market was introduced, giving savers the option to build an ISA portfolio qualifying for inheritance tax exemptions for the first time. 

Following this, ISAs were launched with a separate contribution allowance for stocks and shares (£7,000) and cash (£3,000, if used reduced stocks and shares allowance), which prevailed until 2014 when savers were given the option to utilise the full allowance (£15,000) in either a stocks and shares or cash ISA, or a combination of both. This provided much more flexibility to amend the way ISAs were used as life changers, such as moving investment ISAs to cash to reduce risk or to invest cash ISAs to achieve higher growth. 

From 2016 Flexible ISAs were introduced allowing savers to make withdrawals and return these funds to the ISA in the same tax year without it counting as a new subscription; however, caution was needed as not all ISAs were flexible ISAs.  

In recent years, further iterations of the ISA have been introduced: 

• IFISAs – innovative finance ISAs providing access to peer-to-peer lending 

• LISAs – lifetime ISAs to encourage saving for house purchase or retirement with government ‘top-up’ of 25% 

• JISAs – junior ISAs allowing savings for children up to age 18 

• HTBISA – help to buy ISAs to assist savers from age 16 in the purchase of a first home (no longer available) 

While most of these products have helpful applications, it has been suggested that the increase in options has led to perceived complications with ISAs. Previously, relative simplicity compared to other options such as pensions had been a strength of ISAs. 

While there was no specific mention at the recent spending review, the consensus is that the UK is likely to face increased taxation in the near future to repair the damage done to public finances by the COVID-19 pandemic. Nevertheless, it is clear this will be a difficult balance as direct increases to taxation could well derail a potential economic recovery. 

It is relatively likely that at least part of the burden will fall on savers and investors, in particular much has been made of the disparity between rates of income tax and capital gains tax (CGT). If we do see increases to CGT, this will make ISAs even more attractive in allowing investors to build a portfolio free of CGT (as well as income tax). 

However, with the exception of the government incentive on lifetime ISAs there are no initial tax reliefs for investing in ISAs and therefore they are typically funded from taxed income, which can be inefficient for higher and additional rate taxpayers (assuming 45% tax and 2% National Insurance on the full amount, an additional rate taxpayer would need to earn £37,735 to fund their £20,000 ISA allowance).  

Therefore, ISAs are likely to retain their current role as an extremely valuable and flexible part of an overall financial strategy, but for many they will work particularly well alongside other tax-efficient methods of saving such as pensions and venture capital trusts.