In Defence of the British ISA

March 10, 2024

When it comes to the journey towards Finance Independence and Retiring Early (aka FI/RE), tax-free investment vehicles are arguably one of the best passive wealth-builders that's accessible for the common person. In a non-tax-free investment account, there are often different layers of taxes that one is expected to cough up: capital gains taxes (for capital appreciation) and income taxes (from interest and dividends). On the flip side, in a tax-free investment vehicle, these taxes don't apply. This means the invested value will yield even more growth and offer less to zero financial burden to "cash-out." 

In the UK where I live now, there is what is called Investment Savings Accounts (ISA) which allows an individual to save or invest their post-tax income of up to £20,000 in a tax year. All ISA subscriptions are tax-free. The comparable system in the US would be the Roth IRA, which has an annual limit of $6,000.

For the upcoming 2024/2025 UK Tax Year, the £20,000 limit has not changed. Instead, a controversial additional form of an ISA has been introduced called the British ISA. This new ISA type will add an additional £5,000 of allowance to the existing ISA. The only, and biggest, caveat is one can only pick UK public stocks in a British ISA. I say it's controversial because this has stirred quite a lot of discussion on social media, mostly on why the British ISA is bad. 

Here are some commonly raised points, followed with my personal rebuttals. 

Point 1: The £20,000 limit has been frozen for years. Instead of introducing a British ISA, the normal ISA should have instead been increased to £30,000 to keep up with inflation.

Jen Never Blogs: Yes, the limit has indeed stagnated since it went up from £15,240 to £20,000 in April 2017. This was 7 years ago, before a pandemic negatively impacted the global economies. 

Looking at the National Statistics website (read: I was very curious and it made for a good Sunday morning sleuthing), the data doesn't support that the limit needs to be adjusted to inflation yet. As it is, the recent total ISA average contribution is £5,696 in the Tax Year 2021/2022. The Stocks and Shares ISA average contribution is a bit higher at £8,690, but likely won't be enough cause for the government to raise the limit. 

Source: Annual Savings Statistics 2023 []

By looking at the data alone, it seems to me that:
  1. The average ISA subscribers are not able to put more than 50% of the current ISA limit. 
  2. Increasing the limit for the entire normal ISA category will only benefit the percentage of high-income earners who are able to easily max out their limit.
  3. Whether it's by design or not, the current limit prevents the high-income earners from disproportionately getting more tax-free benefits than those earning below the median national income. By pushing from £20k to £30k, this could further widen the already worsening wealth gap crisis.

But if we really want to consider inflation in the mix--here's an answer I found after checking it myself. Until today, I did not know that we are well-within the realm of £15,240 in today's inflated value at £19,386. 

(Source: Bank of England inflation calculator)

Whether it's the long-winded response or the inflation reasoning, the commonly argued Point no. 1 does not hold up well when compared to publicly available information.  

Point 2: The UK stock index performance has done poorly versus the US stock index. The British ISA will cause people to lose money.

Jen Never Blogs: This is probably the most fair criticism out there, purely because if we look at the historical performance of the UK, it does show that the economy has yet to reach the last peak since 2006. Off the cuff, I would just say "If you don't want to lose money in a British ISA, no one is forcing you to invest money in it.

The same $20,000 ISA is still there if/when one wants to invest in US/Global tradable stocks available on ISA platforms. And if you're in a position to invest more, there are other options like the Self-Invested Personal Pensions (SIPP, also tax-free) or General Investment Accounts (GIA, not tax-free). 

ISAs are a benefit but are not the only way into building wealth.

Point 3: With the new British ISA, people are just going to move their UK stocks in the normal ISA into the British ISA. This will not benefit the nation positively. 

Jen Never Blogs: This deserves to be dissected into two parts.

Part I: The ability to move the current UK percentage of the normal ISA into the British ISA means it will extend the limit of the normal ISA for use on however you want to use them, including buying more of the US/Global stocks into the normal ISA.

Part II: When it comes to benefitting the nation positively, it's difficult to show a direct result from a low value. So I thought to put this into perspective using real numbers to see if a £5,000 investment will actually move the needle. (Individually, if I'm able to invest £5,000 into the British ISA, I'm leaning on thinking that this won't do anything for the "greater good.")

Case Study:
In the Tax Year 2020/2021 from the same Annual Savings Statistics Report linked above, there are a total of 10,882,000 UK residents who subscribed to any form of an ISA. Only 37.8% of that population are the residents who are earning £30,000 and above annually--37.8% comprises the the median income earners and everyone above the median. 

From the top earning bracket at £150,000 and above annual income, this "only" totals to 207,000 people who have subscribed in an ISA. 

I cross-referenced the 207,000 ISA subscribers from the Personal Income Statistics of the same tax year, and found out that the total number of people who earned that same income bracket is about 464,000 people, making it a 44% of that income bracket population who subscribed in an ISA in that year.

Assuming these 207k people have cash to also invest £5,000 into their British ISA, this could mean a cash influx of £1.03B into British businesses from UK resident shareholders. In my line of work, £1.03B is not a huge number, especially when dealing with large enterprise companies. 

To put this into perspective:
  • £1.03B is 4.8% of the FTSE AIM UK 50 Index market capitalisation
  • £1.03B is 3.1% of Rolls Royce market cap, which by the way did a +380% performance y/y
  • £1.03B is 30,986x of the national average income 

While we, as common people, might not see the direct results, otherwise known as trickledown economics fallacy, as retail investors, it's possible for us to gain from our investment. Secondarily, having more funding can result into bigger budgets for operating expenses such as higher wages for employees, ability to hire locally, budget for technology automation, etc.

Of course, this is still based on conjecture. We will not see the Annual Report for the British ISA until 2027 or 2028. I wanted to put this out there because I'm willing to try this out. If in five years, the UK economy doesn't show any improvement, even after all of these pro-UK economy rulings, I'd happily recall this post and write about the points where I was wrong.

On a personal level, I will gladly participate in the new British ISA, specifically to invest in companies that I already use and support on a daily basis. This is on top of already investing in UK Gilts and in the Enterprise Investment Scheme (EIS).

Finally, I'm not claiming to be an authority on what is good or bad when it comes to retail investing or saving up for retirement. I'm not a licensed financial advisor so take this post with a grain of salt. All the links to the sources are embedded in the post so please feel free to review them too.

My investing principles are guided by my own philosophy in life and my portfolio is well-diversified. That said, I do believe in the saying that the grass is green where we water it. I also believe in proactively being a positive contributor in my chosen community and right now, the UK is my chosen home, so why wouldn't I not want to invest in it. 

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