Isas are "ineffective" and benefit those on higher incomes the most, according to the Resolution Foundation.
In a report published this weekend (April 6), the think tank said while the policy of £20,000 a year of tax free savings was well intentioned, it was poorly targeted.
It said: "Vastly more tax-relief is given to those on higher incomes as they are more likely to have an Isa and more likely to have substantial Isa savings.
"In 2018-20, 54 per cent of working-age families in the top 10 per cent of the income distribution had an Isa, compared to less than 18 per cent in the bottom 10 per cent.
"Similarly, nearly half (48 per cent) of Isa holders with incomes over £150,000 had Isa savings exceeding £50,000, whereas the vast majority (65 per cent) of Isa holders with incomes less than £10,000 had savings of less than £5,000 in their Isa."
The Resolution Foundation went on to say Isas are expensive for the government, especially as interest rates remain high.
The report was published as we enter a new Isa year.
It added the latest figures showed just 7 per cent of Isa holders maxed out their allowance, with higher earners more likely to do so.
The report said: "38 per cent of Isa holders with incomes above £150,000 maxed out their Isa allowance in 2020-21, compared to just 6 per cent among Isa holders with incomes of £20,000-£29,000."
And the report added the government's new UK Isa, which prioritises investment in Britain, was unlikely to increase saving.
It urged the government to "get serious" about the lack of household saving in the UK.
The think tank concluded: "Isas have been available for 25 years, but they have done little to address the problem of low savings in Britain, with as many as one-in-three (30 per cent) of working-age adults living in families with savings below £1,000.
"For this reason, we have previously made the case that Isas should at least be capped at £100,000. The tax revenue raised from such a policy could be spent on expanding Help to Save – a saving policy specifically targeted at low income families.
"More recently we have shown that behavioural interventions are much more effective at boosting saving, with the most obvious example being pensions auto-enrolment."
tara.o'connor@ft.com
What's your view?
Have your say in the comments section below or email us: ftadviser.newsdesk@ft.com
