A Silver Anniversary for the ISA: What Does the Next 25 Years Hold?
On 6 April, ISAs reached the grand old age of 25. When they first appeared in 1999, they were seen largely as a rebranding by Chancellor Gordon Brown of two schemes introduced by his Conservative predecessors: Nigel Lawson (Personal Equity Plans – PEPs) and John Major (Tax Exempt Special Savings Accounts – TESSAs). Since that far off day, ISAs have undergone many changes.
A success story?
The latest figures from HMRC show that, in April 2022, there was £742 billion invested in adult ISAs, of which 38% was in cash ISAs and virtually all the rest in stocks and shares ISAs. On the face of it, that is an impressive figure – about 28% of the current total government debt.
A different picture emerges from the timelier statistics published by the Investment Association (IA). Their data is less comprehensive, covering only stocks and shares ISAs of its members and the five large investment platforms. The IA also presents the ISA flows as a net figure, that is subscriptions in less amounts withdrawn. The results might surprise you:
Source: Investment Association March 2024
From April 2023 to February 2024 the IA recorded a net outflow of £4.7 billion, although March 2024 will almost certainly see an inflow. The outflow from stocks and shares ISAs recorded by the IA has a parallel in cash ISAs, where the HMRC statistics show a £28.8 billion drop in total investment value between April 2020 and April 2022.
The case for ISAs now
Go back to May 2022 and, for many investors, ISAs offered little advantage over direct investment, a fact that helps explain the net outflows. Two years on, the changes to taxation explained elsewhere in this newsletter have brought new potential tax liabilities for many investors. Over the same period, the rise in interest rates from near zero to around 5% has meant many savers are no longer protected from tax by the frozen personal savings allowance (£1,000 for basic rate taxpayers and £500 for higher rate taxpayers).
The corollary is that the tax advantages provided by an ISA are now more relevant to investors and savers. As a reminder, within an ISA:
All interest is free of UK tax;
All dividends are also free of UK tax (although withholding tax may apply to foreign dividends);
Capital gains are free of UK tax; and
All HMRC reporting is handled by the ISA manager – you have nothing to put on a tax return.
The ISA annual subscription limit is £20,000 – the same as it has been since 2017/18. For a higher rate taxpayer investing in a UK equity income fund with a typical yield of about 4.5%, that could translate into a tax saving of over £300 a year, assuming their dividend allowance is already used elsewhere. There could also be capital gains tax savings – cumulative growth of more than 15% would be enough to create a gain above the 2024/25 annual exemption.
Despite the focus on tax year end subscriptions, the optimum time to invest in an ISA is early in the tax year, to maximise the period of favourable tax treatment.
Talk to us about your ISA options, both for new contributions and for making the most of existing ISAs. It might be time to transfer that old cash ISA which once offered such a good rate but is now classed as ‘closed to new investment’.