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Diminishing Returns

Diminishing Returns


HMRC figures show that many savers are still at risk of wasting the tax benefits of their ISA allowance.

There is no doubt that ISAs have been a big success in helping foster the UK’s savings habit. A new report from HMRC¹ reveals that the market value of all ISA holdings is now around £518 billion, a testament to the popularity of the scheme, which is estimated to have cost the Exchequer £2.6 billion in tax relief last tax year.

Encouraged by the government’s move to raise the annual ISA allowance by nearly 50% over the last five years, the average subscription in the 2015/16 tax year rose to a record high of £6,338. Overall, around £80 billion was subscribed to ISAs last year, an increase of £1 billion on 2014/15.

Yet the figures also reveal that the majority of ISA savers are not making the most of the long-term tax-saving and investment opportunities on offer. Overall, only 9% of individuals maximised their allowance, a figure that rises to 31% for those with income of £100,000–£149,999.

In the 2014/15 tax year, after the limit was removed on how much of the allowance could be deposited in cash, subscriptions went up by £20 billion. Of the total invested last year, 80% was subscribed into Cash ISAs, continuing a trend that has remained broadly static for a number of years. Overall, 52% of ISA funds are held in cash, despite many savings accounts now registering all-time low rates of interest.

The HMRC report shows a stronger preference for Stocks & Shares ISAs over Cash ISAs among higher income groups, whilst the opposite is true for those in the lower income brackets.

Game changers?

But are these trends likely to change? The 2016-17 tax year has heralded the introduction of the new Personal Savings Allowance and yet more cuts to savings rates following the Bank of England’s decision to halve the base rate in August. Moneyfacts reported last month that the average Cash ISA rate had fallen below 1%, and there are warnings of further cuts if the Bank of England reduces the base rate again.

The Personal Savings Allowance enables every basic rate taxpayer who saves into a regular savings account, current account or fixed-rate bond to pay no tax on the first £1,000 of interest. For higher rate taxpayers, the first £500 of interest will be tax-free. At the current average interest rate², a basic rate taxpayer could hold more than £204,000 in a standard instant access savings account, and receive all the interest tax-free.

Faced with the prospect of a ‘lower for longer’ environment for interest rates and investment returns, it remains to be seen whether savers will take advantage of the opportunity to invest their annual ISA allowance in assets with greater long-term income and capital growth potential.

¹ HMRC, August 2016

² Moneyfacts, 31 August 2016

The value of an ISA with St. James’s Place will be directly linked to the performance of the funds selected and may fall as well as rise. You may get back less than was invested. An investment in a Stocks & Shares ISA will not provide the same security of capital associated with a Cash ISA. The favourable tax treatment of ISAs may not be maintained in the future and is subject to changes in legislation.

 Welcome to Andrew Whiting Wealth Consultancy LLP, Senior Partner Practice of St. James’s Place Wealth Management  

Partners in Managing your Wealth

Whilst banks and building societies maybe the right place for your savings in the short term or as an emergency fund, deposits will not meet the longer-term needs for maintaining the spending power of your capital.

The UK Government has been encouraging a culture of saving for some time.  So it comes as no real surprise that the ISA (Individual Savings Account) is undergoing a makeover with a number of changes.

For example, aspiring first-time property buyers can now get government help through a Help-To-Buy ISA, under which the government will add 25% to savings for a deposit.

Younger savers will also benefit from the longer awaited provisions that allow money held in Child Trust Funds (CTFs) to be transferred into Junior ISAs. The range of CTF providers is limited, and the decision to allow them to be transferred to a junior ISA will give increased flexibility.

In April 2017, people under the age of 40 will be able to open a Lifetime ISA and contribute up to £4,000 in each tax year. The government will then provide a 25% bonus on contributions at the end of the tax year.

Andrew Whiting Wealth Consultancy can talk through the various changes to the ISA structure and the many benefits the product can bring to supplement savings and retirement planning.  If you are interested in discussing the options available please contact Brett Linton on 0121 215 5912 or Click Here to visit our website. Please quote Just Do Property in all communications

The value of an investment with St. James’s Place will be directly linked to the performance of the funds you select and the value can therefore go down as well as up. You may get back less than you invested.

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