40% of high earners don’t have an ISA, based on latest HMRC data. That’s despite ISAs offering protection from tax rates of up to 60%.
Only one in five of those earning over £100k used their full ISA allowance in 2018/19.
Laith Khalaf, financial analyst at AJ Bell, comments: “Four in ten high earners don’t have an ISA, despite facing marginal tax rates of up to 60%, and likely having the spare cash to save a significant sum in tax shelters. The latest ISA figures for the 2018/19 tax year were published by HMRC last week, and show that only 60% of those with income above £100,000 have an ISA.
“Of course that’s still the majority, but when you consider how attractive an ISA is for those paying the top rates of tax, and their high level of discretionary income, it’s pretty astonishing that 40% don’t have an ISA at all. A greater proportion of high earners have an ISA than those with income under £50,000 a year, 60% compared to around 50%, but it’s not as big a gap as you would expect given the additional protection afforded by the ISA if you’re facing high rates of tax on dividends and interest. This is particularly the case for those earning just over the £100,000 mark, where tax rates can be as high as 60% because their personal allowance starts to be withdrawn once their annual income hits a six figure sum.
“It’s possible that high earners are choosing to divert their savings into a pension instead, given the high rates of tax relief they can get on contributions. But there’s still an annual contribution limit of £40,000 a year, including employer payments, which are likely to be quite generous for high earners. There’s also the Lifetime Allowance to consider, which is now frozen at £1,073,100 until 2026. Paying into a pension also doesn’t properly explain why so many high earners don’t have any ISA savings whatsoever, seeing as they work well alongside pensions as a more accessible tax shelter which you can draw on before retirement.
“Some high earners may be business owners, and recycle spare earnings back into their business. That’s understandable, but risky, seeing as your income and your savings are all then tied up in the same business, rather than adding a bit of diversification by putting some money into an ISA. Low interest rates may also mean that high earners don’t think it’s worth getting a cash ISA, but additional rate taxpayers don’t get any personal savings allowance, so for each £100 of cash interest they receive, they are taxed £45, making a cash ISA worthwhile, even if they don’t want to invest in stocks and shares. It’s also likely that some high earners have had their heads, and wallets, turned by a red hot property market, even though property taxes have risen in recent years.
“Whatever the reason, there do appear to be a significant proportion of higher earners who are missing out on the tax benefits of an ISA. There are even more who aren’t taking advantage of the full £20,000 allowance, which was only used by around one in five high earners in 2018/19. The ISA has undoubtedly been a success story in getting people to save for their future, but strangely some of the people who could benefit most still appear to be unmoved by its attractions.”