Death of millionaire Isa? Savings experts give verdict on possible £500,000 limit on tax-free pots

Could Rachel Reeves cap the amount savers and investors can put into Isas in their first Budget on October 30?

The future of tax-free accounts is in doubt, as it emerged that the now Chancellor had previously set a limit of £500,000 in a column she wrote for The Independent in 2016.

It has sparked fears that the Chancellor could reform Isas by imposing a limit on the amount of savings that can be held in them and, as such, could spell the death of the Isa millionaire.

Some of the most dedicated Isa savers have built up pots worth more than £1 million. There are more than 4,000 of these ‘Isa millionaires’, HMRC data reveals, with the average Isa millionaire having a pot of £1.39m.

When it comes to protecting wealth, Isas are the foundation on which diligent savers can build up savings without having to worry about paying tax on their savings.

They allow savers to save up to £20,000 each year tax-free, and many have accumulated huge amounts of money over the last 25 years, away from the clutches of the taxman.

There is currently no limit on the amount of money savers can accumulate in total in an Isa, as long as they meet their annual limit.

Savers who put in half the annual Isa limit each year (£10,000) with average growth of 5 per cent would exceed the Isa limit of £500,000 in less than 25 years.

For those who max out their Isa each year and with 5 per cent growth, this would reach around half a million pounds in year 16.

This is Money asked four savings experts how likely it is that the Government will impose a lifetime limit on Isas in the Budget and what other changes could be in store for Isas.

In July, shortly after the election, we asked the same experts whether Isas could be in the firing line of a Labor tax raid.

Sarah Coles, head of personal finance at Hargreaves Lansdown, said: ‘The Isa offers people a simple way to save and invest, without having to deal with potentially thorny tax implications.

‘Part of its appeal is the simplicity of an annual allowance that controls what is paid, so there are no restrictions on how diligently people can save over the years or the success of their investments. It also benefits from reliability, so people knew where they stood with their Isa investments.

‘Introducing a lifetime limit would destroy both. It would be the worst form of retrospective taxation and risks irreparably damaging the Isa’s reputation as the go-to place to build your financial resilience.

‘Hargreaves Lansdown has 1,240 Isa millionaires, proving what is possible when regular, diligent investors make the most of their opportunities. Adding new limits could mean the death of the ISA millionaire.

‘Even if you are nowhere near maxing out your Isa allowance, you would still be at serious risk of ruining a £500,000 allowance in the long term.

‘If you invest just half your annual allowance (£10,000) and get a typical investment growth of 5 per cent, you would lose your allowance after 24 years and 8 months. It means that taxes on investments would become a big concern for many more people.’

Andrew Hagger, founder of the MoneyComms website, said: ‘I am sure that a lifetime limit on Isa balances is one of the options the Chancellor has considered in her cost-cutting campaign; would probably create less outcry than cutting the £20,000 annual tax-free Isa limit.

‘There is a possibility that the £20,000 Isa allowance (in place from the 2017/18 tax year) could be reduced, but I would be surprised if it happens.

‘It’s more likely that there will be some tinkering with people like the much-maligned Lifetime Isa.

‘Isas could be taxed, but again I would be surprised if that happened. Isa has almost become a permanent fixture for hordes of cash savers and equity investors in the 25 years since Gordon Brown introduced it in April 1999.

“With savings interest rates still relatively buoyant, an increasing number of savers have exceeded their tax-free personal savings allowance and have become more reliant on Isas to keep their interest income away from the taxman, so A sudden change of the carpet would cause much distress and anger among millions of savers.

“I can’t imagine such a radical and unpopular step being taken so early in the new Labor government’s term.”

James Blower, founder of the Savings Guru website, said: ‘I don’t expect the Isa subsidy to be reduced under a Labor government.

“I think allocations will remain frozen, as they have been under the Conservative government since 2016/17, which is effectively a stealth tax rise.

“With the fuel subsidy cut for winter, I think this rules out any possibility of even a modest increase in subsidies.”

“I think in the medium term Labor will look to simplify the Isa system, but for now they have higher priorities and I expect significant changes to come by the 2026/27 financial year at the earliest.”

“I don’t really see Labor taxing Isas; What we have seen from Sir Keir Starmer so far is that he has brought Labor to the center of politics and tried to build confidence to win elections.

“This approach has worked for him and the Labor Party and I don’t see him ruining it by doing something like taxing, capping or capping Isas, which would be incredibly unpopular and result in (relatively) very little extra tax.

“In my opinion, it is easier for Labor to win popular victories if they raise taxes.”

Rachel Springall, finance expert at Moneyfacts Compare, said: ‘Isa allowances could be reviewed in the Budget, and savers could be hopeful that the Isa allowance will rise from £20,000 as it has not changed for years.

‘Isas alone may not be able to address the lack of savings among low-income consumers, and the Labor Party could think about ways to improve this situation.

‘The Labor Party introduced Isa’s 25 years ago and the aim was to encourage people to save or invest their money, tax-free.

‘However, there is a possibility that Labor could review how taxation could work for people with large Isa funds, for example by limiting the amount that can be tax-free.

‘The money raised from taxes could be spent on other initiatives, such as the Help to Save programme.

‘One of the tax-free allowances introduced by the Conservative Party was the Personal Savings Allowance in 2016, and that is something that could change in the future.

“If Labor were to withdraw this, this could lead to a rise in savers turning to their Isa allowance, which protects the interest on their savings from tax.”