Everything wrong with the Great British Isa

The Chancellor is committed to getting savers to invest more in British companies.

The Budget on Wednesday reflected his commitment by introducing a raft of measures focused on ensuring Britons do precisely that.

Reforms will make it easier for pension funds to invest in British companies. Jeremy Hunt also confirmed that defined contribution and local authority pensions will have to declare the breakdown of their asset allocations internationally.

But the key policy is that savers will be given an extra £5,000 annual Isa allowance if they invest in British stocks.

The Great British Isa will “channel more investment into UK equities”, budget documents explain, and alongside the British Savings Bond, a three-year fix administered by National Savings & Investment, forms the bulk of the offering for savers in this year’s announcement.

But consultation documents paint a murky picture, pointing to expected delays and a litany of unanswered questions.

Analysts said the benefit of the new type of Isa would be a “rounding error” and that forcing savers into a narrower range of stocks would make it more difficult to mitigate risk.

Others said that its success would depend entirely on its takeup, and that it was a further complication to the originally simple Isa regime.

Investment platform AJ Bell suggested that a saver consistently investing £5,000 in a tracker over a decade would have earned £30,000 more by putting the money in non-UK funds.

Here, Telegraph Money explores the potential problems with the new Great British Isa – as well as when it might be introduced.

What is the new Great British Isa?

The UK Isa will be a new type of Isa. It is not yet clear which platforms will offer it, but savers can expect that household names will be encouraged by the government to participate in its development.

The key difference between a UK Isa and a normal cash or stocks and shares Isa is that it must be invested in British companies.

“The main objective for the UK Isa is to support a culture of investment in the UK and to give people the opportunity to invest and benefit from the UK’s vibrant capital markets and high-growth companies,” the consultation document reads.

Only a very few will benefit

The Chancellor announced that there would be an additional £5,000 Isa allowance for those investing in the new UK Isas.

Savers can already save £20,000 a year tax-free in Isas. They will be able, from April, to open as many cash or stocks and shares Isas as they like, as long as they don’t go over the total limit.

Lifetime Isas (Lisas), which are topped up by the Government and must be used for either buying a first home or retirement, alongside some limited other options, have their own £4,000 annual limit, which forms part of the overall £20,000 allowance.

Savers can of course save outside of Isa wrappers, but those who hold enough to earn more than £1,000 in interest annually if they are a basic-rate taxpayer, or £500 if they are a higher rate taxpayer, will pay tax on the interest they earn. Additional-rate payers receive tax bills for all the interest they earn.

It isn’t clear whether savers will be able to use the rest of their Isa allowance, which sits at £20,000, in their UK Isa, or whether that will have to be put into other Isas.

But many commentators said that savers would be likely to maximise their existing holdings before looking to open a UK Isa, meaning that the change would only affect the very highest earners.

Brian Byrnes, of investment platform Moneybox, said: “It is unlikely the UK Isa will deliver real benefit to the vast majority of retail investors.

“The fact is that with a very small minority of investors currently able to max out the current £20,000 tax-free limit, the additional £5,000 allowance will likely solely benefit a small group of wealthier investors who are able to take advantage of it.”

Michael Summersgill, chief executive of investment platform AJ Bell, said: “A tiny minority of people max out their £20,000 Isa allowance each year, but these are the only ones that will see any benefit from the additional UK Isa allowance.

“In the context of the £2 trillion-plus UK stock market, any additional investment generated by these investors through the UK Isa will be a rounding error.”

The chief executive said that 50pc of the money his customers hold in stocks and shares of Isas is already invested in UK assets, so the new allowance would have a limited impact on consumer behaviour.

What will I be able to do with my UK Isa?

While it is clear that money held in a UK Isa must be invested in British assets, there are a number of questions about what it means to be “supporting a culture of investment” in the country.

The Government consultation on the UK Isa asks a number of questions, including whether ordinary shares in UK incorporated companies that are listed in the UK should be included.

It also asks whether corporate bonds and gilts should be eligible, and whether there are investments that are already permitted for other Isas that should be included.

The Government wants to prohibit the use of the extra £5,000 for cash-like assets, and is seeking views on how to achieve this.

After announcing Isa changes in his Autumn Statement in 2023, savers will be allowed to open more than one Isa of the same type in a single tax year.

But the Government said not allowing this for the UK Isa would make them simpler and would make it less likely that investors would put too much money in in a single tax year.

Transfers from UK Isas into other types of Isa could also be banned, in order to stop savers opening one to use the new allowance and then immediately moving the money elsewhere.

Respondents are also asked whether investors should be allowed to transfer money from other Isas into the UK Isa, with the Government advising that there aren’t similar restrictions for other types of Isas.

Significant delays likely

The Government has launched a consultation into the new type of Isa, which will close on June 6, 2024. It has confirmed that it will hold a number of “roundtables” – meetings – with the industry, in order to seek their views.

After the consultation closes, the Government will issue a response – but it has not set a date for this report.

The Treasury has acknowledged that despite significant digitisation of the Isa reporting regime to HMRC in the last year, platforms will need time to update their systems in order to offer the new UK Isa.

While it was less than six months between the announcement of significant changes in November’s Autumn Statement and their implementation in April, that is no guarantee that providers will be able to move as quickly again.

So it seems unlikely that the UK Isa will be available in the next tax year.

Complicating matters

The Isa system, which was initially hailed as an easy and simple way for retail investors to put money into the stock market, has become more and more complicated as a result of piecemeal reforms.

Analysts said that rather than simplifying the system, as many hoped, this change will only make things more difficult to navigate.

Mr Summersgill said: “For most people, the UK Isa only adds an unwelcome complexity. Rather than complicating Isas, the Government should be making it easier for people to invest by simplifying the Isa landscape.”

Andrew Prosser, of online investment platform InvestEngine, said: “While efforts to support British companies should be welcomed, this shouldn’t be achieved by putting responsibility onto the shoulders of everyday investors.”

He said that the narrow focus of the UK Isa could mean that small-time retail investors were left to navigate a tricky environment that they did not fully understand.

Mr Prosser said: “The announcement of a UK Isa will only act to encourage people to concentrate investments in UK equities, something which is unsuited to most retail investors and would expose their savings to unnecessary levels of risk and potential losses.”

Will you be putting money in a UK Isa? Email money@telegraph.co.uk with your thoughts.