Let’s not mince words: the cash ISA cut is a stealth tax grab

The cash ISA annual allowance cut is a stealth tax grab and the Government is not being straightforward about this, editor Edmund Greaves writes.

The rumour about a cut to the annual cash ISA allowance has reared its head again. The reasoning behind it is built on dishonesty. And I have numbers to show why. 

How much do you put in a cash ISA each year? Personally, I haven’t put a penny in. There’s a good reason for this – there’s no need for me to do so. 

The reason why I don’t need to use a Cash ISA is because my pension is my primary long-term savings vehicle. But I am also a long way from worrying about the tax implications on my savings because I have a personal savings allowance (PSA). 

For basic rate taxpayers the allowance is £1,000, while those on the higher rate get £500. 

Let’s crunch some numbers to see how much I’d need to break above the PSA, using some general savings account rates. 

As of today (27 October), you can get an easy access savings account with a rate of 4.4% with Cahoot, a subsidiary of Santander UK. 

In order for a basic rate payer to breach their PSA, they’d have to have £22,290 saved to earn £1,001 in interest (for argument’s sake). A higher rate payer would breach their £500 allowance with £11,150. 

Now, let’s assume the higher rate payer has no debt (other than their mortgage) and is able to save 20% of their net income a month (after 5% pension contributions). They would have to be earning an annual gross salary of £80,300 in order to receive enough net pay to make £929 a month in savings contributions to then breach the PSA. 

I’m not going to do the numbers for the basic rate payer because it would be ludicrous. They’re never going to hit it unless they’re doing extreme ‘FIRE’ saving and have basically no costs. 

According to the HMRC’s most recent data, the average annual contribution across all income brackets was about £7,000 (£69.5 billion in contributions divided by 9.93 million accounts). 

So the Government’s own data tells us that most people are falling well short of hitting savings levels that the cash ISA will protect them from over and above the PSA. 

In that context, what good is halving the allowance going to do?

The real reason for the cash ISA cut

The truth in the data is that for most people cutting the cash ISA allowance isn’t going to do anything. And most of those people aren’t going to be saving anywhere near enough to even breach their PSAs either. 

Saying we need to cut the cash ISA allowance in order to encourage more investing is a laudable aim. But I don’t think it’s the real aim.

Instead, we have to consider that the Government saying that it wants to encourage more investing is a bluff. It is a straw man, a dodgy dossier, a fig leaf – whatever analogy you choose to use.

My view is that the real reason we’re getting a cash ISA cut is because the Government thinks it can cream off some income tax from the top end of savings wealth, cash heavy, households who need to move their money somewhere tax-efficient each year. 

Who are these people going to be by and large? Pensioners. 

From this group, ultimately those who are going to take this hit are the ones who are unadvised. 

Indeed, it is absurdly easy to avoid the cash ISA allowance problem if you really want to. Stick the money in a stocks and shares ISA then put it in a money market fund. It’s a cash ISA by-proxy using the stock market.

But the problem is many people who aren’t advised (or savvy enough with their money) won’t know to do this and will find themselves paying extra tax because their tax-free cash ISA allowance has been cut. 

Of course, for those retirees who don’t have an income from a salary, they will have up to £5,000 of interest tax free – the so called ‘starting rate for savings’. But with state pension nearly at the personal allowance already, this is basically pointless. Any earned income above the state pension will rapidly collapse the starting rate for savings. 

My contention is that the Government is not being honest about why they’re cutting the cash ISA rate. Although encouraging investing is indeed laudable and necessary, we know many people simply won’t respond this way. They were cash dependent for a reason to begin with. 

It is a stealth tax, pure and simple. What people do with that information, when correctly informed, is now up to them. 

This article first appeared on Mouthy Money’s sister publication Octo Members.

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