The UK ISA and what the Spring Budget means for your finances

Facing an upcoming election and a fragile UK economic climate, the Chancellor of the Exchequer was challenged with crafting a Spring Budget that balanced voter appeal with a perception of responsible fiscal management.

Therefore, while the tax landscape is set to be altered significantly, the government took no chances with a budget that is expected to do little to change the fundamental economic picture.

During yesterday’s Budget we heard that inflation is expected to fall below the government’s 2% target in “just a few months’ time,” according to Chancellor Hunt, down from 4% in January. The Bank of England’s long-term target is to keep inflation at a “low and stable” 2%. Additionally, the economy is expected to grow by 0.8% this year and 1.9% in 2025.

Here are the key announcements:

• The introduction of the “UK ISA” aimed to reignite sluggish UK stock market returns and funnel money into UK businesses. The new product will allow individuals to invest an extra £5,000 into UK equities tax-free on top of the existing £20,000 ISA subscription limit. Please note: the government is still to consult on the final details and there’s no confirmed start date.
• Intentions to require local authorities and defined contribution (DC) pension funds to disclose how much they have invested into UK shares.
• The pension triple lock was maintained. In 2024-25, the full yearly amount of the basic state pension will be £3,700 higher, in cash terms, than in 2010.
• The higher rate of CGT for residential property disposals will be cut from 28% to 24%. This change is aimed to encourage landlords and second home-owners to sell their properties, making more available for a variety of buyers including those looking to get on the housing ladder for the first time.
• A cut to National Insurance (NI) contributions. From April, workers will pay 2p less in NI, which could reportedly save the average earner up to £450 a year.
• Adjustments to the child benefit system will see the High-Income Child Benefit Charge threshold increase from £50,000 to £60,000.
• New tax duties mean vaping and smoking will be more expensive. However, continued freezes on fuel and alcohol duty mean petrol and drink prices won’t go up.

Our views on the UK ISA

While, we welcome the announcement of the UK ISA. We believe the government must do more, and compel UK pension funds to invest more in UK-listed companies. This budget was a missed opportunity to mandate institutions to boost our economy and markets. The bottom-line is that the UK ISA does not deliver the stimulus we need to boost flagging UK markets, but it is a good start to help boost the economy and attract foreign investment.

From a market perspective, we have no way of knowing how much investment the UK ISA will unlock, however, we continue to believe in backing the UK economy and companies, whether through the new UK ISA or your current ISA portfolio.

At the end of the day, the expansion only matters for those people who have more than £20,000 that they want to invest tax-free. Looking across 2020/21 (the latest available figures from HMRC) about 1.6 million people maxed out their ISA allowance that year, roughly 15% of ISA accounts*. The data also shows that 60% of ISAs see £4,999 or less invested each year*. 

Despite a number of headwinds over the past decade, a number of UK funds have delivered strong outperformance, compared with the IA UK All Companies and UK Smaller Companies sectors, which have delivered 50.44% and 58.25% respectively**. Here are the top ten Elite Rated funds for those investors looking to take advantage of UK plc.

The best performing Elite Rated UK equity funds over 10 years**

*Source: HMRC, 22 June 2023

**Source: FE Analytics, total returns in sterling, 6 March 2014 to 6 March 2024