Autumn Budget: how Labour might change ISAs and the dividend tax

Pension savers look like fair game as the Chancellor seeks to fill the ‘black hole’ she has identified in the nation’s finances. But should ISA savers be worried too? After all, Rachel Reeves herself once called for a lifetime cap on ISA savings and a freeze in the annual allowance.

And could another tax break from which private investors benefit, the dividend allowance, be scaled back or abolished when Ms Reeves delivers her Autumn Budget on 30 October?

ISAs

ISAs and pensions are the two main vehicles for long-term savings. But while the tax breaks on pensions have been subjected to repeated and significant changes, often to savers’ detriment, ISAs have generally been left untouched even by chancellors on the lookout for extra tax revenues.

• See our current offers to help your money go further

For example, the pensions annual and lifetime allowances (the latter now scrapped) have experienced multiple changes, both upwards and downwards, over the years. The annual ISA allowance, by contrast, has only ever been increased. It started at £7,000 in 1999, then went up to £7,200 in 2008 and £10,200 in 2011, then to £15,000 in 2014 and finally in 2017 to £20,000, where it has remained.

There has never been a limit on the value a saver’s ISAs can reach in a lifetime or on the amount that can be contributed over a lifetime.

Why the difference between ISAs and pensions? Perhaps it is easier for politicians to paint pensions as a savings method used mainly by the 'rich', given the large annual allowances, while ISAs are seen to have more mass appeal with 12.5 million account holders. And the Labour government has promised not to increase taxes on 'working people'.

There have been occasional calls for ISAs to be made less generous, however. Last year the Resolution Foundation, a research organisation that seeks to improve living standards for those on low and middle incomes, called for a lifetime cap on ISA savings of £100,000. It confirmed to Fidelity last month that this remained its view.

And eight years ago Ms Reeves herself called for a lifetime limit on ISA savings of £500,000. In an article in the Independent on Sunday she wrote: 'Let's introduce a lifetime allowance of £500,000 for ISA investments.' She also implied that she regarded the annual allowance as generous, writing that 'the increase in the ISA limit from £7,000 to £15,000 over the past decade has only helped those who can save big sums of money every year... [let's] freeze the annual limit at £15,000 for the remainder of this parliament.'

A major accountancy group has said such a limit could be announced in next week's Budget. BDO said in September: 'It's not impossible that the chancellor could seek to impose a lifetime cap on ISA saving - perhaps set at around £500k. If this were to happen, we would hope that the limit would be indexed to rise in line with inflation. We could also see a reduction in the annual allowance available for cash ISAs, but an increase in the annual allowance for stocks and shares ISAs in an effort to support economic growth.'

Barness Altmann, a crossbench peer and former pensions minister, said any new cap would be 'terrible'. She told Fidelity: 'A lifetime cap on ISAs would be another terrible idea following in the footsteps of the lifetime cap on pensions, which was finally abolished but not before causing all kinds of problems. Tax-free ISA investments should facilitate investment for the future and should be about earning good investment returns rather than having to worry about whether your investments grow "too successfully" as you get older so that you exceed the cap. Curbing the costs to the Exchequer should come from controlling the amount going in, which is already done, rather than penalising good performance over the years.'

Dividend allowance

Changes here look more likely. The dividend allowance allows the first £500 in dividends received by an investor in any tax year to be tax free. But the allowance is relevant only if the shares or funds that pay the dividends are held outside an ISA or pension – in other words if they are held in a general investment account or even in the form of a share certificate. Investments held in an ISA or pension are tax-free anyway. This could give Labour more political cover for any reduction of the dividend allowance, because it could say, with some justification, that investors who own shares outside ISAs and pensions are those who already use their entire ISA and pension allowances every year, and are therefore well off.

A further reason to fear a cut in the dividend allowance, or even its outright abolition, is that those who own shares outside ISAs and pensions will in many cases be the same people who may have to pay capital gains tax on the sale of shares, a tax that again is not due within those tax-protected schemes. And those investors do indeed seem to be regarded by Labour as legitimate targets because much pre-Budget speculation has centred on possible rises to this tax or a cut in the annual tax-free allowance, or both. Labour’s manifesto did not include a commitment not to raise CGT or cut the allowance. There was also no mention of dividend taxes.

Lastly, the dividend allowance has already been cut steeply twice in recent years by the Conservatives to its now rather measly level of £500 so perhaps Labour would not face much of a backlash if it carried on where the Tories had left off and scrapped it altogether.

Our latest Autumn Budget analysis

• Autumn Budget: how Labour might change IHT
• Autumn Budget: how Labour might change pensions
• Autumn Budget: how Labour might change CGT

Important information - investors should note that the views expressed may no longer be current and may have already been acted upon. Tax treatment depends on individual circumstances and all tax rules may change in the future. Withdrawals from a pension product will not be possible until you reach age 55 (57 from 2028). This information is not a personal recommendation for any particular investment. If you are unsure about the suitability of an investment you should speak to one of Fidelity’s advisers or an authorised financial adviser of your choice.