Rachel Reeves urged to SCRAP Cash ISAs completely amid record £14bn deposits hitting Treasury tax take

A major UK investment platform has launched a campaign to abolish cash ISAs.

IG's "Save Our Stock Market" initiative argues that cash ISAs are "hindering rather than helping" people build wealth, with analysis showing cash savers have earned just one-seventh of the real returns achieved by equity investors since ISAs launched in 1999.

The campaign comes as HMRC's latest figures show April's cash ISA deposits were the highest since the savings vehicle debuted 26 years ago.

"We're watching a crisis unfold and we need bold action," said Michael Healy, UK Managing Director at IG.

The surge in cash ISA usage has been partly attributed to savers seeking tax-free shelter amid rising interest rates, as well as recent speculation about potential cuts to cash ISA limits.

As a result, the Government's tax revenue from savings has fallen short of expectations, with collections revised down from a forecast £10.4 billion to just under £6 billion for 2024/25.

Laura Suter, director of personal finance at AJ Bell, explained the "whopping £4.5 billion shortfall" in expected savings tax receipts was likely due to interest rates not staying as high as initially forecast and a growing number of people sheltering their money from HMRC.

Despite the lower-than-anticipated revenue, the overall tax bill on savings is still projected to reach £6.1 billion in 2025/26 - more than triple the figure from just three years ago.

"While this is a small victory for savers, we can't ignore the fact that the amount of tax we're paying on savings has risen from just £1.4bn in 2021/22 to an estimated £6.1bn in the current tax year – a whopping 336 per cent increase," Suter noted.

Although more people are shielding their savings from the tax man, IG argues the UK has maintained a "savings-first" mindset for too long - one that discourages market participation and leaves ordinary households overly reliant on low-yielding Cash ISAs.

As the cost of living crisis continues, the platform says savers should be looking to the markets to build long-term wealth, not relying on cash accounts that fail to keep pace with inflation.

The aim of their four point reform plan is to redirect "billions in tax relief from low-yield cash savings into more productive equity investments" by ending new cash ISA openings and reducing the allowance to zero from April.

The platform also wants stamp duty on shares abolished, describing it as "a self-inflicted wound" that unfairly penalises UK investors, noting that no other major economy taxes equity investment in this way.

To encourage domestic investment, IG proposes 20 per cent income tax relief on UK shares held in ISAs for at least three years, modelled on the Enterprise Investment Scheme.

To demonstrate its commitment, IG is offering new customers a free UK share worth up to £100 throughout July and August, with stocks randomly allocated from companies including M&S and Rolls Royce.

The UK stock market faces mounting pressure, with 88 companies departing in 2024 while only 18 joined, according to IG's analysis.

High-profile firms including Arm Holdings have opted for overseas listings seeking better valuations, whilst companies such as Wise, Flutter Entertainment and Ashtead Group have relocated their listings to the US.

Healy said: "With our SOS campaign, we're calling on the government to deliver the urgent policy changes our stock market needs, from scrapping Stamp Duty on UK shares to encouraging a shift away from stagnant cash savings, and using incentives rather than penalties to get people backing British firms.

“For too long, policymakers have been paralysed by the desire to keep everyone happy. But the time for working groups is over - this is about getting more Brits investing, while saving a strategic national asset before it's too late.”

IG is proposing a four-point policy framework to help resuscitate the UK stock market while also benefiting the public by getting more people investing. These four policy asks are:

1. End the Cash ISA myth: Redirect billions in tax relief from low-yield cash savings into more productive equity investments by ending cash ISA openings and bringing the cash allowance to zero from April. For millions of people, Cash ISAs are hindering rather than helping them to build wealth.
   
2. Call time on Stamp Duty: Stamp Duty on shares is a self-inflicted wound. No other major economy taxes equity investment like this. Remove this outdated tax that unfairly penalises UK investors.
   
3. Reward investors for backing the UK: Encourage retail investment in UK companies by providing 20% income tax relief on UK shares held in ISAs for at least three years, modelled on the successful Enterprise Investment Scheme.
   
4. End the culture of fear when it comes to investing: Step back from an overly cautiousregulatory approach that reinforces fear of investing. Central to this, clarify the difference between advice and guidance so that financial services providers can promote long-term investing benefits without regulatory uncertainty.