New ISA year begins with £20,000 allowance as Resolution Foundation publishes Spotlight on ISA costs and effectiveness

The new ISA year began on 6 April 2024, with savers able to put up to £20,000 into an ISA over the following year and pay no tax on the returns¹. The Resolution Foundation published a Spotlight paper the same day, setting out the cost of the tax relief and its assessment of who benefits¹.

The Foundation said the tax relief offered through ISAs is expected to cost the Treasury £6.7 billion in 2023-24, up from £4.9 billion in 2022-23¹. It attributed much of the rise to higher interest rates boosting returns on savings, and said cuts to the dividend allowance, from £2,000 to £1,000, and the capital gains tax-free allowance, from £12,300 to £6,000, also increased deposits into ISAs and the cost of the reliefs¹. It said there were over 22 million ISA holders in 2020-21, around two in five (42 per cent) UK adults, and that £67 billion was deposited into 12 million adult ISAs in 2021-22¹.

On distribution, the Foundation said 54 per cent of working-age families in the top 10 per cent of the income distribution had an ISA in 2018-20, against 18 per cent in the bottom 10 per cent¹. It said 48 per cent of ISA holders with incomes over £150,000 had ISA savings above £50,000, while 65 per cent of those with incomes under £10,000 had less than £5,000 saved¹. The richest tenth of working-age families owned close to a third (29 per cent) of all ISA savings¹. On the allowance, it said £20,000 is equivalent to two thirds (67 per cent) of typical earnings of £29,700, and that only 7 per cent of ISA holders (1.6 million people) maxed out their ISA in 2020-21, including 38 per cent of those with incomes above £150,000 and 6 per cent of those on £20,000 to £29,000¹. Families with an ISA in the middle of the income distribution saved an average of £160 a month, £1,920 a year, and only around 1 per cent had average monthly savings sufficient to exceed the annual allowance¹.

The paper also covers the government's planned "UK ISA", announced at the Spring Budget, which would carry an extra £5,000 of tax-free savings for those investing in UK-based assets¹.

On whether ISAs raise saving, the Foundation said the rise in the annual allowance in 2014-15, from £11,520 to £15,000, was followed by deposits increasing from £57 billion to £83 billion between 2013-14 and 2014-15, but that the adjusted saving ratio fell from 2.4 per cent to 1.6 per cent over the same period¹. It said 30 per cent of working-age adults live in families with savings below £1,000¹. The paper repeats the Foundation's previous proposal that ISAs should be capped at £100,000, with the revenue spent on expanding Help to Save, and argues for behavioural approaches such as pensions auto-enrolment¹.

Why it matters for households

The £20,000 annual allowance applies for the 2024-25 tax year, which began on 6 April 2024¹. Within an ISA, income such as dividends, interest and bonuses, and capital gains, are exempt from tax¹. The Foundation's figures indicate that most holders use only a small part of the allowance: 7 per cent maxed it out in 2020-21, and middle-income families with an ISA saved £1,920 a year on average¹. The proposed UK ISA would add £5,000 of tax-free saving for investment in UK-based assets, on top of the existing allowance, and would therefore only be usable by those with more than £20,000 a year to save¹. The paper does not set out how the UK ISA would work in detail, and no start date for it is given¹. The Foundation's own proposals, including a £100,000 cap on ISA savings, are recommendations and not government policy¹.

What happens next

The UK ISA was announced at the Spring Budget and a consultation has been published¹. The Foundation's paper does not state when the UK ISA would be introduced or when the consultation closes¹.