Hunt’s right; tax should incentivise us savers to boost Britain.

Cash ISAs are strange. They are supposed to encourage long term saving  but are used as a tax-shelter for higher rate tax-payers who have large amounts they do not want to invest – for the long-term.

The Chancellor is now planning ways for those wealthy people to switch from saving (in cash) to investing (in shares). The FT reports as much

The levers that the Chancellor can use are primarily around allowances. The most radical idea the FT claims to be under consideration is the creation of a new ISA (akin to the old single company PEP) that would offer tax-breaks to people investing in UK companies using the UK stock exchange. This angers free marketeers who fear that people’s wealth would be compromised by the promotion of “home bias”.

But this argument is about ISA investors already investing in shares. Most ISA savers invest in cash. Currently you can get what looks a healthy return for doing so (numbers from Money Saving Expert)

Putting money in a Cash ISA may sound a great way of getting a tax-free return  until you take a step back. The return you are getting is not a “real-return”, it is not keeping up with inflation , even at these higher rates.

Secondly, the rates you get from a Cash ISA tend to be lower than you get from the open market and if you can get open market returns “tax-free”, Cash ISAs are just a lot of tax-fuss about less than nothing.

In practice, few of us hold enough money in cash deposits to make Cash ISAs work, they work best for the providers of Cash ISAs who can make more money from this product than from running a simple deposit account.

This is because almost all of us (apart from those paying 45% tax) get a personal savings allowance

that means that we can save meaningful amounts in a bank account and not have to pay tax  on it.

When interest rates were impossibly low, then the PSA was impossibly high, right now the PSA is low but even today a basic rate tax payer has to have over £20,000 in cash and a 40% taxpayer, half that, to pay tax on non-ISA cash. So for most of us, Cash ISAs are an expensive waste of time. Cash is not a good long-term home for money, a Cash ISA that encourages long-term saving in cash is not a good way to invest and it really doesn’t make sense for the Government to incentivise that kind of saving.

Saving into shares is a good long term investment

  • Investing the full Personal Equity Plan (PEP) and ISA allowance since PEPs were launched in 1987, followed by ISAs in 1999, would have delivered an almost fourfold return of £1.37 million
  • When you factor in interest compounded over the period, equities still return over twice as much as cash

Investing in shares is good for your finances, even if they don’t provide the security of a gradually rising bank balance.

Of course many of us would rather not invest in something that goes down as well as up, so shares (and bonds) are bad news for the nervous person’s heart rate. But then so’s looking in the window of your estate agent when house prices are going down!

So I support people getting out of Cash Isas when they do nothing but lose people money and I support people getting into shares – and buying shares within an ISA to avoid tax.

I also want to support the British economy, when it makes sense to do so. So if the Chancellor can help me to help myself and UK companies, I will consider moving savings into UK shares (equities).

That seems totally logical. My savings should supports investment into companies which pay tax in the UK and provide the growth in the economy to pay future pensions , healthcare and education. Using tax grants for that is fine by me.

Rather than putting money in Cash ISAs, we should put money in Share ISAs. Share ISAs that invest in companies that support our welfare, are fine by me.


About henry tapper

Founder of the Pension PlayPen,, partner of Stella, father of Olly . I am the Pension Plowman
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6 Responses to Hunt’s right; tax should incentivise us savers to boost Britain.

  1. John Mather says:

    This might be the time to move the cash from a guaranteed loss of buying power( CPI 6.7% RPI 9%) to an ISA which buys indexed gilts) ?

    • Peter CB says:


      The problem with index linked gilts is that they do not pay meaningful annual interest (the coupon interest rate on most issues is 0.18% – albeit that is indexed). In substance it is the indexed nominal value at redemption that is major benefit.
      In practice by buying index linked gilts in the market you are paying the anticipated terminal value discounted by the market’s current view of interest rates and inflation. If interest rates and inflation expectations go up the market (and realisable) value goes down if sold before redemption.
      I am not sure all pension schemes fully appreciate this and that by holding them they are purely hedging interest rate and inflation assumptions.
      As the majority of buyers and sellers in the market are pension schemes, there is an element of a self fulfilling prophesy about using them as a predictor of future inflation in actuarial valuations.

    • Richard Bryan says:

      Buy low-coupon gilts in an unseltered account as the capital gain is not subject to CGT, and save the ISA for shares.

  2. DaveC says:

    I’m pretty sure you can swizzle cash ISA to S&S ISA and back again.

    And they all have merit at different times in the business cycle.

    Bonds don’t go down in value either. You should only ever make money on bonds. Losing money means you bought the wrong product (ie, someone sold it on your behalf when it’s value dropped, great move)

    I’ll happily invest in the UK economy when there are things worth investing in.

    Rishi has proven in recent weeks that long-term policy around things like energy (pretty critical) are just things to tinker with randomly.

    How can anyone invest in the UK when the goalposts keep moving on critical things?

    I’m still not even sure what our energy policy is except using gas to fill the gaps, and if that means turning off industry, or peoples cookers at peak times, so be it.

    Does a country swirling the toilet sound like a good place to invest money?

  3. Eugen N says:

    You cannot use tax advantaged products to make a stock market revival.

    Investors do not invest mainly because it is tax advantageous but because there a return on capital for those companies they choose to invest close or ideal higher than cost of capital.

    The majority of UK companies are non-investable because their Return on Invested Capital (ROIC) is low, and people choose instead the U.S., Canadian or even Indian market, because it offers higher ROIC.

    This is the issue the Chancellor should address, how these companies could increase ROIC and why it does not happen.

  4. Jack J says:

    These days you don’t need to have much in a non-ISA savings account to breach your Personal Savings Allowance. For a 40% taxpayer less than £10,000 saved in a decent account will see you in trouble.

    We all know that Cash ISAs are not a good place to invest for the long term, but with Cash ISA rates of 5.7% (which I am getting) or higher available, one can make a good case for keeping a decent amount of money as cash in an ISA rather than invested. Particularly in a drawdown world where many advisors advocate keeping one or two years’ income in cash, and the rates currently being paid for cash on pension platforms are a joke.

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