AJ Bell has urged Chancellor Jeremy Hunt to consider a long-term simplification of the ISA system in the March Budget.
Last year’s Autumn Statement included some reforms to the ISA system, but Tom Selby, director of public policy at AJ Bell called these “very modest” and added that they do not “amount to the radical simplification savers and investors are crying out for.”
While AJ Bell called for fundamental reform, in its absence Selby suggested reducing the Lifetime ISA (LISA)’s Government-imposed early withdrawal charge from 25% to 20%, and increasing the minimum property price to account for rising house prices, particularly in London.
He also suggested increasing the overall ISA allowance from £20,000 and creating a mechanism to peg the allowance to inflation, as well as removing ISA funds from Inheritance Tax (IHT).
Selby said: “The Budget could be this Chancellor’s final opportunity to strip unnecessary complexity out of the ISA rules and demonstrate he is on the side of Brits who do the right thing and save for their financial future.
“As the Treasury and FCA pursue reforms to improve engagement and tackle the ‘advice gap’ through the Advice Guidance Boundary Review, it is more important than ever the financial products they engage with, including ISAs, are as straightforward as possible.
“Given the proximity of the General Election, fundamental simplification may be off the table for now.
“If that is the case, there are a number of pragmatic improvements to the existing landscape the chancellor could pursue.”
Selby said that the minimum property price should be £450,000, to make the product more useful for first-time buyers.
He added: “Scrapping the LISA age restrictions could also be appealing, making the product more accessible to self-employed workers, many of whom are not saving anywhere near enough for retirement.”
Selby also called for Hunt to end the freeze on tax thresholds, following the Chancellor’s own hints that he would like to reduce income tax in the March Budget.
Selby said: “If the Treasury is considering cutting people’s income tax bills, then increasing income tax thresholds, rather than changing income tax rates, would be the simplest way to do it.
“The freezing of tax thresholds has had a serious impact on people’s finances.
“Recent higher inflation has meant higher wages are pushing more people into the next tax bracket.
“The OBR recently estimated that by 2028/29 the freezing of tax thresholds will see around four million extra taxpayers, three million more moved to the higher rate of income tax and another 400,000 paying the additional rate.
“Restoring increases to tax thresholds will ensure more people pay the tax rate appropriate to their income, considering recent wage inflation.”
