Reports that Labour plans to scrap the British Isa have been met with widespread support from the UK's largest investment platforms, citing the increased complexity such a reform would bring.
We tend to agree. The financial ecosystem cannot afford to weaken the appeal of one of the most valuable tools in the financial planning arsenal, especially as UK savers are set to be in the firing line in the upcoming Autumn Budget.
The policy, originally proposed by former chancellor Jeremy Hunt, was poised to encourage investment in UK companies through a £5,000 tax-free allowance for UK shares within Isas.
However, not only would this further muddle what should be a simple, efficient savings wrapper, but the capital generated from such a scheme would have been a mere drop in the ocean compared to what’s truly needed to revive the UK stock market.
Protect your assets from a ‘tax on savers’
While the government has pledged not to raise taxes on "working people", chancellor Rachel Reeve has made no secret of the need to tackle a fiscal deficit estimated at £20bn.
With few remaining options, it is increasingly likely savers will be targeted in the upcoming Budget with a rise in capital gains tax.
To offset this tax on savers, we urge the government to increase the overall Isa allowance. The current allowance has been frozen since April 2016, despite rising financial burdens on households. By increasing this limit, savers will be better equipped to maximise their tax-free earnings.
Furthermore, unlike pensions, which provide tax relief on contributions, Isas do not cost the government anything up front. This is an easy win.
In the meantime, savers should act swiftly to protect their assets before potential CGT hikes can be implemented. Realising gains now and maximising Isa contributions will safeguard their savings with tax-free growth and withdrawals.
Supercharging the UK stock market
As for reviving the UK’s stagnant stock market, more effective solutions lie in encouraging UK pension funds to increase their investment in domestic equities.
For the past 20 years, these funds have been net sellers, with the Brexit vote only worsening the situation. Since then, the marginal buyer of UK equities has effectively disappeared. Comparatively, other nations are doing much more to support their own markets.
The chancellor must now take action to incentivise pension funds to deploy more of their capital within the UK. Directing more investment into British companies would stimulate both the economy and stock market, and there is no better time to act – especially when the UK market is trading at a substantial discount compared to other developed markets.
Moreover, the UK's uncompetitive stance on stamp duty further hampers market competitiveness. The UK imposes a 0.5 per cent charge on the purchase of UK-listed shares (except those listed on Aim), while the US charges nothing, and France levies just 0.3 per cent.
Eliminating this tax on smaller companies would provide a quick, tangible way to make the UK market more attractive to investors. As recent research from the Centre for Policy Studies suggests, the long-term economic benefits of scrapping this charge would far outweigh the short-term tax revenues.
