City of London firms have in recent weeks urged the UK government to scrap, or scale back, cash Isas, the popular savings products that allow consumers to earn interest free of tax.
The Isa, introduced in 1999, has been wildly popular: just under a third of the UK’s population, or 22.3mn people, holds one, with most opting for the cash variant, according to the latest HM Revenue & Customs data, for 2021-22. Some 7.8mn people hold a stocks-and-shares Isa, which allows consumers to invest free of taxes on their returns.
In recent weeks though, the cash Isa has come under fire. Financial services companies including BlackRock, the Phoenix insurance group have met with chancellor Rachel Reeves and told her to cut tax breaks on cash Isas, or do away with the savings products altogether. Fidelity International told the Financial Times that tax reliefs should be limited to £4,000 a year.
The companies argue that the changes — which would mark the biggest shake-up of the UK’s tax-free savings market since the Isa’s launch in 1999 — are needed to encourage an investing culture in the UK and boost domestic equity markets.
But consumers expressed outrage over the lobbying campaign, arguing that cash Isas form an important part of their personal finances because of their lack of volatility compared with stock market investments and the ability to withdraw money at short notice.
Since 2008-09, the number of people putting money into cash Isas has actually fallen by over a third, to 7.9mn in 2022-23, according to HMRC.
Nevertheless, some City firms say the cash Isa scheme is too generous — but how does it compare with tax-free savings and investment products elsewhere in the world? FT Money explores.
The US
The US has no direct equivalent to the UK’s Isa, but for years lawmakers in Congress have been drawing up bills for a so-called “universal savings account”, analogous to the Isa in that it could be used to save or invest tax free. The legislation has never been enacted, however, because of questions over funding and a lack of consumer backing.
The latest attempt came from Tennessee congresswoman Diana Harshbarger, who introduced a bill in November to create a “tax-exempt savings account”, with a maximum contribution of $10,000 each year.
Unlike the Isa, the savings limit on Harshbarger’s US product would be adjusted for inflation.
The Isa allowance has been frozen at £20,000 since 2017. Had this threshold risen annually to keep pace with core inflation (CPI) it would be worth £26,200 today, or 31 per cent higher.
The two main existing vehicles for tax-efficient investing in the US are the 401(k) and individual retirement arrangements (IRA) accounts — which have age-based restrictions for withdrawal.
Other products, such as the 529 college savings plan, offer tax benefits but come with stipulations on what the returns can be spent on. “We have about 12 tax-preferred accounts, but none of them are universal savings accounts,” said Will McBride, chief economist at the Tax Foundation, a Washington-based think-tank.
Canada
Canada’s tax-free savings account (TFSA) allows savers to put in C$7,000 a year from the age of 18. But unlike the UK’s Isa, unused Canadian TFSA allowances are carried forward each year and accumulate over time.
The TFSA has been hugely popular since its introduction in 2009. Nearly half of Canada’s population, or 17.8mn people, held one, according to the latest government figures for the 2022 tax year.
“If you think about the lifecycle of savings, naturally young people are not huge savers — they’re in college, they’re spending money to pay for their lifestyle and education,” says McBride. “It’s later in life that you build up savings, after you’ve worked several years and you can put away some money.”
McBride described Canada’s system as “very generous”. By the age of 28, an individual who has not put any of their money into a TFSA will have accumulated a total allowance of C$70,000.
Japan
The Japanese government introduced the Nippon individual savings account (Nisa) in 2014, a scheme overtly modelled after the UK’s Isa. There are two categories within the Nisa — the “growth quota” and a “Tsumitate quota”. The latter is more restrictive on what investments can be put into it and requires individuals to invest into it at least twice a year. Japan does not offer an equivalent to the cash Isa.
Unlike the UK and Canada, Japan has imposed a lifetime allowance on its Nisa. Investors can put a combined total of up to ¥3.6mn per year — including both growth and Tsumitate quotas — and have a lifetime allowance cap of ¥18mn, or around £95,000.
Japanese consumers have long been reluctant to invest after decades of deflation, low interest rates and a series of stock and property market collapses. Just over a third of the country’s personal wealth was held in cash, compared with 15 per cent in the UK, according to a study published this year by asset manager Abrdn.
The Nisa was introduced to coax savers into the stock market, but was enhanced in January 2024 with increased contribution limits and expanded tax benefits, after it failed to drive investment over the previous decade.
Since then, uptake has increased dramatically, with the number of accounts rising by one-fifth to 25.6mn in the year after the rules were changed; the amount invested increased 71 per cent to ¥52.7tn, according to Japan’s Financial Services Agency. Inflows were, however, concentrated in US and world equity funds, according to financial data provider Morningstar.
Analysts at Morningstar predicted in January that the government would reach its target of ¥56tn in Nisas in the first quarter of 2025 — two years earlier than planned.
France
In continental Europe, France offers products akin to the Isa, with its Livret A savings accounts. Some 81 per cent of French people had a Livret A account as of December 2022, according to Banque de France, the state bank.
Holders of the Livret A — first introduced by King Louis XVIII to repay debts after the Napoleonic wars — benefit from tax-free interest payments, with the savings rate set by the French government. Rates were cut from 3 per cent to 2.4 per cent at the beginning of February.
Livret A accounts are offered by French banks, but a portion of the funds raised is given to the state bank, which uses the money to build social housing. Savers can withdraw money from their Livret As at any time free of charge, but total deposits are capped at €22,950.
The country also offers investment products similar to the stocks-and-shares Isa, in the form of the “plan épargne actions” (PEA). But the PEA is far less popular than the Livret A — just 15 per cent of the country held the former, according to a poll in January this year by Ipsos.
Determining which product is the most generous is difficult, however. It is important to take the tax system as a whole when comparing tax wrappers in different jurisdictions, said Tom Selby, director of public policy at investment platform AJ Bell — which has not backed the financial services companies’ proposals on cash Isas. “Each country has different tax systems, demographics, social makeups and areas of policy focus which will lead to natural variations in the way incentives are structured.”
Robert Salter, director at accountancy group Blick Rothenberg, noted: “A lot of the Asian countries don’t tax dividends or stocks at all — you could say everything is an Isa in those cases.”
Salter questioned the City’s push to reduce tax breaks on cash Isas, given that most people don’t invest their full allowance — only 4.6 per cent of the 14mn people holding cash Isas reached the £20,000 annual limit in 2021-22, according to the government’s latest figures. A total of £294bn was held in cash Isas in 2022-23, HMRC data showed.
“I struggle to see how much the government will actually gain from reducing the limits,” Salter said. “If they are going to restrict this or tighten it, they’ve got to do a really good job of explaining why and how they intend to use it.”
Selby said the current Isa landscape had “drifted from simple beginnings into something akin to Frankenstein’s monster”. To encourage more people to invest for the long term, he added, the Isa regime needed to be simplified.
Additional reporting by Ian Johnston
