Everything you need to know about the Chancellor’s UK ISA proposal

25th April 2024

On 6th March 2024, Chancellor Jeremy Hunt delivered the Spring Budget.

Among several announcements surrounding tax, Hunt revealed a proposal for a new type of Individual Savings Account (ISA): the UK ISA, also being referred to as the “British ISA.”

In the consultation stages until 6th June 2024, the UK ISA is still only a proposal and isn’t available to use yet. Nevertheless, it could help to learn more about this new type of account before it reaches the market.

In this article, we will explore:

  • What the Government sets out to achieve with the new UK ISA
  • Some potential benefits of this new investment opportunity
  • The possible drawbacks that investing within the UK ISA might involve.

Keep reading to learn everything you need to know about the UK ISA.

The UK ISA would give investors an additional £5,000 a year for UK-based holdings only

In his speech, the Chancellor said:

“After a consultation on its implementation, I will introduce a brand-new British ISA which will allow an additional £5,000 annual investment for UK equities with all the tax advantages of other ISAs.

“This will be on top of existing ISAs and will ensure UK savers can benefit from the most promising UK businesses as well as supporting those businesses with the capital to expand.”

When speaking about the “tax advantages of other ISAs,” the Chancellor is referring to the fact that as of the 2024/25 tax year:

  • You can invest up to £20,000 a year across all the adult ISAs you hold, including the Cash ISA, Stocks and Shares ISA, and Lifetime ISA (LISA), which has its own £4,000 annual subscription limit. The £4,000 LISA subscription forms part of the overall £20,000 limit.
  • Any growth your money generates within your ISAs is free from Income Tax and Capital Gains Tax (CGT), and any dividends you receive are free from Dividend Tax.

We’ve written detailed insights about the benefits of using ISAs as an investment vehicle before. For now, what you need to know is that ISAs can be used as a tax-efficient way to save and invest for your future.

As you read earlier, the UK ISA would add £5,000 a year to your £20,000 subscription limit. But unlike the rest of your ISA allowance, through which you have access to the global stock market, you’d only be able to invest your additional £5,000 in UK-focused assets.

As the Chancellor mentioned in the Spring Budget, this would enable investors to support UK businesses and funds, as well as increase the amount you can spend on tax-efficient investments each year.

Now, let’s look at some potential pros and cons of the UK ISA.

The UK ISA would offer further tax-efficient investment opportunities

Over the long term, an additional £5,000 a year in ISA investments could boost the tax efficiency of your wealth by a significant margin.

For instance, if you would usually pay £20,000 into your Stocks and Shares ISA each year and place an additional £10,000 into a General Investment Account (GIA), you could alter this strategy and pay £25,000 into your ISA, and only £5,000 into your GIA.

Capital gains, dividends, and interest earned in GIAs may count towards your tax liability for that year, whereas within an ISA, your money can earn a tax-efficient yield.

This is just one example of how the UK ISA could improve tax efficiency for investors, although this strategy may not be right for everyone and could carry some risk.

Nevertheless, over a period of 10, 20, or even 30 years, an additional £5,000 a year in tax-efficient investments could help to grow your wealth.

The UK ISA could risk overexposure to UK assets

When we work with our clients to build an investment portfolio, one of our biggest priorities is diversification.

Diversification means that instead of putting all your eggs in one basket, you’re investing in different asset classes, industries, sectors, and regions. This helps to ensure that if one type of asset or holdings within a specific region drop in value, only a small portion of your portfolio may be affected.

This is where a potential downside to the UK ISA comes in. If you invested £20,000 in non-UK holdings, and £5,000 in the UK alone, this means that 20% of your investment portfolio would be UK-based.

However, as of 2023, according to Visual Capitalist, as of Q2 2023, the UK stock market only made up 2.9% of the world’s total equity market value. So, having a portfolio made up of 20% of UK investments could risk overexposure to a very small portion of the global market.

One example of how this could affect you is the upcoming general election. Historically, general elections have rocked UK markets over the short term.

Sometimes, this is a positive change – the Guardian reports that after the 2019 general election, the London stock market “surged by £33 billion”. Yet the pendulum can swing the other way, too; after Liz Truss was elected as Prime Minister, Bloomberg says that “£300 billion was wiped from the nation’s stock and bond markets”.

An overexposure to UK assets could mean that your investment portfolio is at risk of being adversely affected by UK market performance over time.

Get in touch to learn more about tax-efficient investments from a Financial Planner

If the UK ISA becomes available to investors later this year, it could be wise to discuss this new opportunity with an independent Financial Planner.

We can help you invest with tax efficiency as a top priority. Email us at enquiries@pen-life.co.uk, or call 01904 661140.

Please note

This article is for general information only and does not constitute advice. The information is aimed at retail clients only. All information is correct at the time of writing and is subject to change in the future.

All contents are based on our understanding of HMRC legislation, which is subject to change.

The Financial Conduct Authority does not regulate tax planning.

The value of your investments (and any income from them) can go down as well as up and you may not get back the full amount you invested. Past performance is not a reliable indicator of future performance.

Investments should be considered over the longer term and should fit in with your overall attitude to risk and financial circumstances.

Category: Industry News