The American investor, Warren Buffett, once said: “Do not save what is left after spending, but spend what is left after saving”.
Your savings provide the foundations of a successful long-term plan, safe in the knowledge that you have funds stored away for emergencies and to help provide for your future.
One of the most efficient ways to save is through an ISA. It is a vehicle that offers highly beneficial tax breaks for individuals that make the most of them.
However, that could be due to change in the future. Recently, a leading think tank and charity has proposed introducing an “ISA savings cap” to stop wealthy families from benefiting excessively from their associated perks.
Read on to learn about the think tank’s plans, how they could affect your savings, and what you can do about it.
The Resolution Foundation and the abrdn Financial Fairness Trust have proposed a £100,000 total ISA savings cap
As you read in our recent guide, an ISA is a form of savings account that allows you to put away up to £20,000 in the 2022/23 tax year without being required to pay tax on any interest or gains.
There are several forms of ISAs:
- Cash ISAs
- Stocks and Shares ISAs
- Innovative Finance ISAs
- Lifetime ISAs
Cash ISAs allow you to save and any interest is paid tax-free.
Meanwhile Stocks and Shares ISAs are effectively a “tax wrapper” that means you don’t pay any Income Tax or Capital Gains Tax (CGT) on profits you make.
However, as many medium-to-low income families don’t have the savings available to fully take advantage of the benefits of an ISA, the study found that these incentives primarily favour wealthier individuals.
According to report in the Telegraph, the top 10% earning UK households are on course to gain £800 on average from ISA schemes next year. Meanwhile, the poorest 10% of households are expected to receive as little as £38. The UK is said to be the worst developed nation for savings with more than 700,000 families having no cash savings whatsoever.
The idea of a lifetime limit to the amount you can save into an ISA — capped at £100,000 — would aim to bridge the gap and raise around £1 billion each year for the public purse by the end of the 2023/24 tax year.
An ISA offers a wide range of benefits and a cap would limit your tax-free saving options
In the 2022/23 tax year, an adult individual can invest up to £20,000 in ISAs. You can spread this investment between multiple accounts including putting money into both Cash and Stocks and Shares ISAs.
The introduction of a £100,000 cap would mean that, once you hit the lifetime limit (which could be as little as five years if you maximise your contributions) you would then be liable for taxes.
You would likely need to assess other options for your funds, which may not have the level of benefits and wealth protection associated with current ISAs.
3 proactive ways to make the most of ISAs now, just in case proposals become a reality
- Make the most of your annual ISA allowance
It is important to make the most of your annual ISA allowance each year, as it cannot be carried forward into the next tax year.
You should also note that a cap doesn’t currently exist so, at present, you can keep investing up to the maximum – £20,000 in 2022/23 – into ISAs each year and benefit from the associated tax relief.
The more you have invested, the greater your tax relief savings, and the larger your potential compound returns over time.
If you haven’t used your full allowance for the 2022/23 tax year yet, there’s still time before 5 April 2023 to save or invest.
- Consider your combined allowances if you have a partner
Each individual is entitled to the £20,000 annual ISA allowance so, if you have a spouse or partner, you effectively have £40,000 each year to utilise.
Spouses and civil partners can usually transfer assets between them tax-free. So, it is possible to move funds between parties if necessary to maximise both ISA savings allowances.
- Save for your children’s futures with a Junior ISA
If you have children, or grandchildren, opening a Junior ISA (JISA) can be a good way to create a nest egg for a loved one.
JISAs can be opened on behalf of children under the age of 18, and anyone can pay money into their account up to an annual limit.
The 2022/23 tax year limit is £9,000.
The money saved could help your loved ones receive a healthy boost when they first venture out into their adult lives.
Read more: The essential guide to ISAs
Get in touch
If you’re looking for a way to reduce tax liabilities and save efficiently, an ISA might be the right move for you. A good first step could be seeking professional advice to assess your options.
Contact us by email at email@example.com or call us on 01189 876655.
The value of your investment can go down as well as up and you may not get back the full amount you invested. Past performance is not a reliable indicator of future performance.
This article is for information only. Please do not act based on anything you might read in this article. All contents are based on our understanding of HMRC legislation, which is subject to change.