Macro insights

A look at the evolution of Individual Savings Accounts

It’s been 20 years since the then Chancellor of the Exchequer, Gordon Brown, announced his plans to launch Individual Savings Accounts, or ISAs.

Effectively taking over the space previously held by Personal Equity Plans (PEPs) and Tax-Exempt Special Savings Accounts (TESSAs), ISAs went live in April 1999 and since then millions of pounds have collectively been squirreled away in these tax-friendly vehicles.

Their popularity is understandable - when you save or invest via an ISA, any gains made are tax-free and you don’t even have to declare ISAs on your annual tax return. According to official figures, it is estimated that the Exchequer cost of the tax relief for ISAs in 2015 – 2016 was approximately £2.6bn.2

At their inception individuals were given an annual savings limit of £7,000 for a stocks and shares ISA but just £3,000 for the cash version.

However it was well-documented that many savers and investors felt the yearly limits were insufficient. It took until April 2008, for the annual contribution limit to rise, and then it was only to £7,200 for investment ISAs and £3,600 for cash.

Since then the upper threshold has increased more markedly. In October 2009, it went to £10,200 for stocks and shares - and £5,100 for cash - but only for savers over 50. But by April 2010, these applied to everyone. In July 2014, the cap shot up considerably for both investors and savers, to £15,000.  

A marginal rise occurred in the following tax year but in April 2017, HMRC pushed the boat out once again, by taking the maximum yearly savings cap to a more generous £20,000.

But while the ISA savings and investment limit has expanded over the past two decades, the wrapper itself has enjoyed its own evolution.

For example, November 2011 witnessed the launch of the Junior ISA, for the under 18’s, which presently has an annual savings limit of  £4,128. To give first time buyers a leg-up onto the property ladder, in 2015, the government launched the Help-to-Buy ISA. A year later, the Innovative Finance ISA, which lets you invest in alternative investments such as peer-to-peer loans was rolled out.

In 2017 the newest addition to the set, the Lifetime ISA came into existence. Effectively replacing the Help-to-Buy ISA, this version lets users save for either a first property or their retirement.

In their near two decades since launch, the amount of money held in these wrappers has increased considerably and at the end of the 2016-17 tax year, the market value of adult ISA holdings was £585bn, representing a 10% rise on the previous 12-months.3

Notably, this rise was primarily fuelled by an increase in the market value of funds held in stocks and shares, which rose by 20% compared to the previous year before. In addition, while this tally of holdings are split almost identically, the balance is tipping in  favour of the investment ISA with 46% accounting for cash and 54% in stocks and shares vehicles.3

END

1 Gov.uk - https://www.gov.uk/government/uploads/system/uploads/attachment_data/file/687060/Full_Statistics_Release_August_2017.pdf (page 9)

2 Gov.uk - https://www.gov.uk/government/uploads/system/uploads/attachment_data/file/687060/Full_Statistics_Release_August_2017.pdf (page 6)
3 Gov.uk - https://www.gov.uk/government/uploads/system/uploads/attachment_data/file/687060/Full_Statistics_Release_August_2017.pdf (page 12)