The public finances are a mess. To blame? Covid-19, largely.
Government borrowing soared during the pandemic, with huge amounts of cash being splashed on the National Health Service, on government support for businesses and the self-employed, and on huge amounts of personal protective equipment. I’ll say nothing about the wisdom—or not—with which some of that money was spent.
Meanwhile, tax revenues slumped. Shuttered businesses, empty pubs and restaurants, unemployed self-employed, and a dearth of spending as people stayed home instead of splashing cash in shopping malls and on the High Street, or on going on holiday.
No wonder, then, that Rishi Sunak, the Chancellor of the Exchequer, took the decision to hike taxes sharply upwards from April. Frozen income tax bands—for five years, no less—plus an increase in the National Insurance rate, plus an increase in Corporation Tax.
It’s not going to be pretty. According to The Economist, the tax burden by 2026 will be 36% of GDP — a post-war high.
Déjà vu
Older investors have lived through this sort of thing before. The 1970s, the 1980s, Gordon Brown’s tax raid on pensions in the 1990s, George Osborne’s austerity regime: we’ve seen it all.
And on an Internet discussion board the other day, I saw a suggestion that Rishi Sunak wouldn’t stop with the tax rises scheduled for April, but would go on to tax ISAs as well, levying income tax on dividend income (and presumably interest income on cash ISAs as well).
You can see the logic. Inside an ISA, investors’ savings and investment portfolios prosper freely, free from income tax and capital gains tax. A sizeable slug of wealth now sits in such accounts: for a chancellor on the take, the appeal is obvious.
Temptation meets political reality
Or is it? I don’t think so.
In fact, I’m fairly certain that investors can safely disregard such a suggestion.
First, consider the political damage—not just to the already-unpopular Conservative party, but also to Rishi Sunak personally. Many older investors still angrily remember Gordon Brown’s tax raid on pensions: tax people’s ISAs, and Rishi Sunak’s name would be mud. And Mr Sunak, don’t forget, is one of the leading contenders to take over from Boris Johnson.
Second, consider the logic. Quite apart from there being little point to a tax-sheltered account that wasn’t in fact tax-sheltered, there would be howls of anguish from the ISA industry, which would be tasked with collecting the tax.
And third — at least as far as income tax goes — it simply wouldn’t raise very much. Particularly in relation to the political pain caused.
Do the maths
How so? Because dividend taxation is — at least for standard rate taxpayers — fairly low, and therefore unattractive for a chancellor with tax-raising in mind.
The Dividend Allowance was introduced with effect from the 2016/17 tax year, and was set at £5,000, where it remained for the tax year 2017/18 as well. It was then cut to £2,000 for the year 2018/19, where it has remained. Dividend income above this, if held outside an ISA, is liable to income tax at the applicable dividend tax rate.
And what is the applicable level of income tax for standard rate tax payers? 7.5%, with the first £2,000 of dividend income, as we have seen, being tax free (assuming that there are no non-ISA holdings).
Higher rate tax payers? 32.5%, which is a rather heftier grab. But, of course, there are rather fewer such ISA holders — and presumably they represent a core Conservative-voting constituency. Would the Chancellor be so daft? I don’t think so.
Howling voters
What about other taxes on ISAs? A savings tax on cash ISAs, say? Well, from 6 April 2016, basic-rate taxpayers can earn up to £1,000 in savings income tax‑free — so presumably, an ISA tax would kick in after that. For higher rate taxpayers, granted, the allowance is £500. But the resulting howls of anguish can be imagined.
Capital gains tax? Again, there would be howls of anguish. The record-keeping burden imposed on ISA-holding ordinary tax-payers and voters would be enormous, and again, what would be the point of an ISA if they were subject to income tax and capital gains tax?
In other words, I’m fairly convinced that our collective ISA earnings are fairly safe. And while that remains, ISAs — especially stock and shares ISAs, rather than cash ISAs — remain an attractive investment opportunity.