Isas – a soft target

At the end of 2017, the market value of all Isas, according to HM Revenue & Customs, stood at £585bn. On one level that means Isas remain small fry. After all, the latest stab at estimating wealth in the UK from the Office for National Statistics puts the total at £12,778bn, of which Isas would represent less than 5 per cent. By far the biggest chunks of wealth reside in property and pensions, which together account for about 77 per cent. Focus in on financial wealth, however, which tots up to £1,636bn, and Isas account for about a third of that.

And their value has been growing fast. In the five years to the end of 2017 the value of all Isas grew at 8.6 per cent a year. Simultaneously, the stocks-and-shares component, which comprised just over half the total by the end of the period, compounded at 10.7 per cent annually. That implies a nice rate of wealth enhancement during straightened times. Over the same period, real disposable income per household grew by all of 0.6 per cent a year.

Granted, Isas are a reasonably egalitarian savings tool – 11.1m adults (over one in five of the adult population) subscribed to one in 2016-17, although that was down from 12.7m the year before. And by far the biggest group of holders, both for cash and for stocks-and-shares Isas, are those whose income ranges from £10,000 to £20,000. While – predictably – the number of holders whose income tops £100,000 falls away sharply, the average value of their holdings rises rapidly so that those with an income above £150,000 on average hold Isa funds worth over £70,000; and 62 per cent of such people saved the maximum allowance in 2015-16 compared with 22 per cent overall. Put another way, among Isa savers with income of £150,000 or more, 43 per cent have Isa savings of at least £50,000 compared with just 7 per cent of savers with income below £5,000.

The demography of Isa holders is also interesting. By far the biggest group of savers – with over 6.5m accounts in 2015-16 – are those aged over 65. Their funds also had – by a similar order of magnitude – the biggest average value (over £40,000). However, 3.6m of these savers – 56 per cent of the total – made no Isa subscription in that tax year. True, that’s only a quarter more than the national average where 45 per cent of Isa savers made no subscription in 2015-16. Even so, it accords with the notion of elderly people running down their Isa savings to supplement their pension income.

So here’s the question: should the government scrap the tax-shelter around Isas to raise revenue that would help pay the rising cost of social care? No, if you reckon that those who would be most penalised are the very people the state most needs to help with these prohibitive costs. But, yes, if you think that Isas are chiefly a perk for the affluent who have been doing very nicely from surging capital values these past few years even as the income of ordinary folk continued to stagnate.

Whichever your view, it is easy to see that Isas are a soft – and fairly juicy – target. Consider that £585bn of market value locked up in Isas. Fairness and political expediency might say that the £270bn of cash Isas should keep their tax shelter. That leaves £315bn in the stocks-and-shares component. Assume an income yield on the capital of 4 per cent plus a tax rate of 40 per cent and that would raise about £5bn a year, much the same – and politically less painful – as raising income tax by a penny in the pound.

Yet, while it might be easy to construct an argument that taxing stocks-and-shares Isas might be reasonable, would it really be fair? The table indicates it wouldn’t (and click below for a spreadsheet that shows the full underlying data). This compares the progress of average UK household disposable income and total returns from UK shares, both minus the effects of inflation, in the five decades since 1970.

Clearly, the ‘rentier’ returns from shares have been better than the returns from employment. However, in two of those five decades employment trounced rentier returns as equity values bounced around, but more down than up. And arguably the volatility of equities basically serves to confirm what financial theory says – that the long-run superior returns from equities are no greater than investors require for living with the uncertainty of risk and occasionally its painful effects.

However, the worry for holders of stocks-and-shares Isas is that the subtlety of that argument will be lost in the clamour as the imperative moves – as it surely will – towards extracting more tax revenue from wealth and capital in the UK of the 2020s.