Is Your Savings Account About to Get a Boost? The Lowdown on the New ISA Proposal

For many of us, the idea of saving money and watching it grow without the looming shadow of tax is a delightful one. Enter Individual Savings Accounts (ISAs). These little financial vehicles have been a go-to for Brits for years. Now, the Telegraph reports, there are whispers in the corridors of power about making them even more attractive.

What’s on the Horizon for ISAs?

Jeremy Hunt has been in deep discussion about the possibility of increasing the amount you can save in an ISA each year. Currently, that limit is £20,000, but there’s talk about upping that by £5,000 or even £10,000.

When you invest in stocks and shares within an ISA, any growth in your investment doesn’t get hit by capital gains tax. This tax-free growth could mean substantial savings over the years. For example, a higher rate taxpayer who takes full advantage of a potential £30,000 cap could see capital gains savings of a whopping £35,490 over two decades, as worked out by financial experts at Hargreaves Lansdown. Opt for a £5,000 rise, and you’re still looking at a tidy £17,970 less paid to the taxman.

What’s the Motivation Behind These Changes?

The Chancellor is looking to overhaul ISAs as part of a bigger plan: to get more people investing in Britain. This might include an extra allowance for those investing specifically in UK companies.

This move is reminiscent of old school Personal Equity Plans (or PEPs for those who remember) which ISAs took over from in 1999. These PEPs had a stipulation: a certain chunk of the investments had to be in UK companies.

How Will Savers Benefit?

Last year, a significant 800,000 people maxed out their ISA contribution by investing the full £20,000, exclusively in stocks and shares, based on official data. If the proposed changes come to fruition, these folks stand to gain from the increased allowance.

But here’s where it gets interesting. A good portion of these savers – around 310,000 of them – earned more than £50,000. If you’re earning over £50,270, you’re looking at a 20% tax on capital gains outside of an ISA. For those earning under that threshold, they’re mostly partners of these higher earners or individuals who have substantial cash savings to play with.

For the regular Joes and Janes who are lower rate taxpayers (those taxed 10% on capital gains), the proposed ISA changes could still mean savings. If the cap jumps to £30,000, we’re talking about a potential £17,970 saved over 20 years. And if it’s a more modest increase to £25,000? You’d still pocket an extra £8,985.

It’s worth noting, though, that all these savings figures are based on a hypothetical 6% annual return. And, as with any investment, it’s essential to remember that past performance isn’t a guarantee of future results.

What’s Next?

Jeremy Hunt is set to unveil his plans in the forthcoming Autumn Statement. But it’s not all smooth sailing. Some financial insiders have voiced concerns that a separate allowance just for UK companies could muddle the waters, making the ISA system trickier to navigate.

Harriet Baldwin, head honcho of the Treasury Select Committee, pointed out that our current tax system is, let’s face it, a bit of a maze. So, there’s a golden opportunity to streamline things.

Yet, James Ashton, from the Quoted Companies Alliance, has another take. He believes that if we’re genuinely committed to rejuvenating our public markets, directing tax-efficient ISA funds towards UK stocks is a no-brainer.

A spokesperson for the Treasury summed it up by stating they’re open to suggestions on how to make ISAs even more enticing to Brits looking to nurture a saving and investing habit.