Government incentives for savings are not doing anything for middle and poorer UK households as most families struggle to save.
Around 750,000 low-and-middle income households having no savings at all, meaning that it is the wealthy that are pocketing the lion’s share of £7bn spent on tax breaks, according to new Resolution Foundation.
The report ISA ISA Baby – published in partnership with the abrdn Financial Fairness Trust – shows that notes the UK has struggled to save for decades. Since 1980, it has had the lowest saving rate of any G7 country in four of every five years.
This struggle to save is a particular problem for low-to-middle income households, with households in the bottom half of the income distribution typically having £3,000 of savings per adult, while around 750,000 families have no savings at all.
Governments throughout the years have tried to address the issue, through a mix of tax reliefs – such as savings allowances and ISAs – and direct support – such as Lifetime ISAs (LISAs) and Help to Save – but when families have no savings at all, rich individuals have gained the lion’s share of support.
Rising interest rates mean that these policies, together with the Enterprise Investment Scheme (EIS), are on track to cost the Exchequer around £7bn per year by the end of 2023-24 in terms of foregone tax revenue and direct payments to households.
Molly Broome, economist at the Resolution Foundation, said: “Government incentives to save do exist but are not fit for purpose – prioritising tax reliefs for those with very large amounts of savings over supporting real increases in the numbers of people with savings.
“Our myriad of savings policies are set to cost the government £7bn next year as interest rate rise, with the lion’s share going to rich households. Spending over £2bn on those with ISA savings of over £100,000, while 750,000 families have no savings at all, is not what a good use of Treasury resources looks like.”
Savings allowances are progressive, with basic-rate taxpayers able to earn £1,000 in savings interest untaxed, compared to £500 for higher-rate taxpayers. But despite this, 41% of the £1.3bn of foregone tax revenue goes to the richest tenth of households, reflecting the far higher levels of saving.
Similarly, ISAs, which are set to cost £4.3bn per year in foregone tax revenue by the end of 2023-24 as interest rates rise, are heavily skewed towards richer households. For working age adults, close to a third (29%) of total ISA savings are owned by the those in the richest tenth of families.
Lifetime ISAs (LISAs) operate differently to ISAs as they provide direct support (a 25% top-up to people’s savings) and are targeted at potential first-time buyers under the age of 40. But close to half (47%) of the £670m of government support is estimated to be going to the richest fifth of households. While intended to encourage more people to save, all of these policies’ main impact is to provide support to many people who were likely to be saving money anyway.
The Help to Save scheme – where people are able to save up to £50 a month and receive a 50% top-up from government – is the only savings policy targeted at low-income families as eligibility is determined by benefit receipt. But while satisfaction with the scheme is high, take-up is low, with under one-in-10 eligible participants using it.
The report notes this may reflect the fact that many benefit recipients are simply unable to save, but with 92% of monthly Help to Save deposits at the maximum value of £50, people who do engage are clearly keen to save as much as possible.
Taken together, the richest tenth of households are set to gain just under £800 on average from these policies next year, around 20 times the gains received by the poorest tenth of households (£38). The average household is expected to gain around £250.
Mubin Haq, Chief executive at the abrdn Financial Fairness Trust, said: “Savings are essential to weathering economic shocks, but too many have no savings especially those on lower incomes. Government support should be targeted at those most in need but currently it is the richest 10% of families who benefit the most from these incentives – their gain is 20 times more than those who are in the poorest 10% of families. It’s essential that help is better targeted to those on lower incomes if we are to provide the safety buffer so many need.
“Help to Save provides an opportunity, but at present this is too small-scale and only taken up by a fraction of those who would benefit. Reforms such as auto enrolling benefit claimants could quickly transform this initiative into a much-needed safety net for millions.”
The report call on the chancellor to cut waste by capping the total amount of ISAs savings that are tax-free at £100,000, reflecting the very poor use of resources involved in offering tax relief to 1.5 million people with over £100,000 of savings in ISAs alone. This policy might raise around £1bn per year by the end of 2023-24, and allow scarce resources to be focused on the around 750,000 families with no savings at all.
“The chancellor can address both problems in his upcoming Budget by massively expanding Help to Save for low-income families, and scaling back tax-free savings for already very-rich individuals,” Broome said.
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