The cash Isa needs to be cut. I've told the Chancellor so myself

Telegraph

24-03-2025

Emma Mogford will be answering your questions on her suggested reforms at 1pm today. Get involved in the comments section below.
If we are to create the economic growth that is essential for our national prosperity, security and resilience, Rachel Reeves must act now to fix our investment culture.
Last week my firm, Premier Miton Investors, sent a letter to No 11 calling for immediate action to be taken in the Spring Statement. These moves can be made without delay and would be fiscally neutral initiatives that deliver substantial, rapid and beneficial changes for the UK economy.
As an investment management firm with nearly half of our assets under management invested in the equity capital of 418 UK-listed companies of all sizes, we strongly support reform for the UK's long-term domestic savings and investment sectors.
The Government is keenly aware of the challenges we face, and these four actions would deliver strong benefits to our economy.
Limit cash Isas
Limiting the future tax benefit to £5,000 would significantly reduce the almost £300bn allocation to cash within Isas and immediately increase future investment into equities.
We share the view expressed by Emma Reynolds, the economic secretary to the Treasury, that by holding on to cash savings, consumers are missing out on substantial potential investment returns, as the graph below shows. There is a significant benefit for both investors and the UK economy from this cash being invested in more productive assets.
However, to avoid the risk that a large proportion of switched savings would be invested into overseas equities, we propose an incentive to invest those savings in a manner that benefits UK businesses and our economy.
Focus Isa equity allocation on the UK
Limiting all future equity Isa contributions to UK-listed equities, UK domiciled funds that invest at least 80pc in UK equities, UK listed funds and UK Government gilts would provide a significant increase in the proportion of savings invested at home.
This does not prevent any individual investing in foreign companies but it improves the allocation to domestic investment, supports a flourishing UK equity market and is far better for the economy as a whole and the country in the long term.
The tax cost of making this change is nil. The administrative changes involved are minimal and the benefits are potentially significant.
This would not only lift valuations, making it more attractive and easier for firms to raise capital for both organic growth and growth via acquisitions, but support job creation across a range of industries. It would also boost the associated professional services sectors, which is an area of strategic focus for the UK, and bolster the number and size of IPOs in the UK market, further adding to GDP growth.
The purpose of tax wrappers should be to encourage savings, enhance returns and provide incentives for long-term investment in productive assets. Directing more of the UK's savings into UK companies would help to deliver a significant boost to economic growth, to employment and the tax revenues to be invested into UK services – things I'm sure we would all like to see.
Above all, this sort of action would send a strong signal to international capital markets and UK businesses of the Government's intent and commitment to creating a vibrant and resilient domestic investment market.
Saving behaviours are best changed with incentives and there are two key methods we want the Government to consider:
Removing stamp duty on buying UK equities
We recognise stamp duty raised £3.3bn in 2023 in much-needed tax revenue. However, the potential benefits of reducing UK companies' cost of capital and encouraging domestic investment would be an even bigger economic boost.
A staggered approach, such as eliminating stamp duty on buying equity in small companies, as in France, or on small transactions, could be considered a step towards full elimination.
An intermediate step may be to remove stamp duty on smaller company transactions by removing it from all companies outside the FTSE 350. This would provide a much-needed boost to an area of the market that has been under significant selling pressure for some time, thereby encouraging investment in the most dynamic area of the market.
Reintroduce dividend tax credits
The abolition of the dividend tax credit in 1997 was a significant contributing factor to the reduction in allocation by pensions to UK equities. We recognise this is a more costly option, but the benefits could be the most significant and long lasting of all these changes, as it would incentivise large institutional investors to put the enormous pools of UK savings they steward into the best of British businesses. The graph below shows the woeful level of pension investments allocated to domestic funds.
We believe there is a genuine appetite for further reform to our domestic savings and investment sector. Provided we do this well, we are on the cusp of the most impactful set of changes in 40 years.