UK’s saving incentives not fit for purpose with the rich pocketing lion’s share of £7 billion cost

Government incentives for savings are not fit for purpose, with around 750,000 low-and-middle income households having no savings at all, as rich individuals benefit from costly and unnecessary tax breaks, according to new Resolution Foundation research published today (Monday).

The report ISA ISA Baby – published in partnership with the abrdn Financial Fairness Trust – examines the scale and distribution of savings across the UK, the impact of savings on families’ financial resilience, and which households key savings policies have benefitted.

The report notes that Britain 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.

This lack of savings can pose a real threat to living standards – families in this position are 18 times as likely to report being unable to cover an unexpected expense, and three times as likely to report low levels of happiness, as those with savings.

Successive governments have recognised the problem of struggling to save, and have attempted to address it through a mix of tax reliefs – such as savings allowances and ISAs – and direct support – such as Lifetime ISAs (LISAs) and Help to Save. Rising interest rates mean that these policies, together with the Enterprise Investment Scheme (EIS), are on track to cost the Exchequer around £7.0 billion per year by the end of 2023-24 in terms of foregone tax revenue and direct payments to households.

However, the report warns there is little evidence these policies have encouraged more people to save, and conclusive evidence that rich individuals have gained the lion’s share of support.

The authors note that 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 per cent of the £1.3 billion of foregone tax revenue goes to the richest tenth of households, reflecting their far higher levels of saving.

Similarly, ISAs, which are set to cost £4.3 billion 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 per cent) 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 per cent top-up to people’s savings) and are targeted at potential first-time buyers under the age of 40. But close to half (47 per cent) of the £670 million 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.

Finally, Help to Save – where people are able to save up to £50 a month and receive a 50 per cent 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 (only 3 per cent of people report being dissatisfied with it), take-up is low, with under one-in-ten eligible participants using it. The report notes this may reflect the fact that many benefit recipients are simply unable to save, but with 92 per cent 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.

The report says that as the Chancellor approaches his ‘tax reforming Budget’ in March, he should consider overhauling Britain’s savings policies to cut waste and focus government savings policy on getting more people saving rather than rewarding those who already have very significant savings.

To do this, Help to Save (which is estimated to currently cost just £43 million) should be expanded by auto-enrolling benefit claimants into the scheme, doubling the monthly savings cap to £100, and excluding the scheme from the savings rules in Universal Credit that reduce people’s benefit entitlement if they have savings.

The Chancellor should also 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 £1 billion 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.

Molly Broome, Economist at the Resolution Foundation, said:

“Britain is not a nation of savers. This lack of financial resilience has left many exposed during the cost-of-living crisis, with families having to build up debts and fall behind on bills.

“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 £7 billion next year as interest rate rise, with the lion’s share going to rich households. Spending over £2 billion 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.

“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.”

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 per cent of families who benefit the most from these incentives – their gain is 20 times more than those who are in the poorest 10 per cent 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.”