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Currently, the ISA allowance is £20,000 per year, that allows someone to save up £20k and the returns from these investments are Tax Free, be it stocks and shares or cash.
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Approximately 1.8 million of the UK population use the full £20k allowance and most / i would say all are higher tax earners. The reason i say this is that i do not believe anyone earning under £50 per year could save £20k per year, i.e 50 % of their total take home pay.
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This allowance therefore, disproportionately benefits the wealthy as most people do not have that level of disposable income to save £20k per year. The figures show that the majority of those with ISA’s save less that 5k per year, according to AJBell.
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The result of this policy is that the rich get richer but only as a consequence of they having money, they do not earn this extra benefit.
So what I would do
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I would reduce the allowance £10k. This would result in approximately 1.8 billion of investments being outside the ISA envelope per year generating £0.72 Bn of tax in the first year. For each subsequent years it would increase by 0.72 Bn so after 5 years, it would be producing £3.6 Bn of revenue. This does not include the added value associated with compounding and those on 45% tax.
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This would only affect less than 5% of the population.
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I am not for taxing the wealthy for the sake of it, but I think the tax system should be fair across the board. With this situation, I think the ISA rate disproportionately benefits the wealthy.
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I would also limit the value able to be held in an ISA.
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Did you know that:-
There are nearly 5,000 ISA millionaires in the UK, according to recent government data. This number has been steadily increasing, with a near 10-fold increase since 2016. The number of ISA millionaires has risen significantly in recent years, with a substantial increase from 450 in 2016 to nearly 5,000 today.
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The average ISA millionaire has a portfolio worth around £1.4 million, according to Aberdeen Group plc.
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The top 25 ISA investors hold an average of nearly £9 million each. This means that these individuals receive over £0.5million per year tax free!!
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So what i would do here is limit the value of ISA initially to a maximum of £1m. Whilst this would increase revenue by a relative modest amount in terms of government taxation, £50m, it would be a fair way to raise taxes on unearned income.
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I would also have an allowance of ISA that you can pass over to your children that is not subject to inheritance Tax. That will be dealt with separately when I cover inheritance tax, in particular with the inclusion of your pension pot inheritance tax calculations from 2027, which i think is totally unfair.
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