The chancellor, Jeremy Hunt, is being urged to dramatically cut what people can hold in tax-free individual savings accounts.
A report by think tank The Resolution Foundation estimates the Government could raise around £1billion per year in taxes by capping the total amount people can save in Isas at £100,000.
It said the policy could direct more funding towards helping families with no savings at all, rather than continuing to benefit rich individuals via tax breaks.
The tax protector: Britons can currently save or invest up to £20,000 a year into an Isa
There are currently 1.5 million people who have £100,000 or more saved in Isas, according to the report, while there are around 750,000 families with no savings at all.
At present, Britons can save or invest up to £20,000 a year into an Isa, but there is no overall cap on how much an individual can accumulate during their lifetime.
The report claims that Britain’s current savings policies favour those who already have significant wealth.
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 £2billion 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.’
Existing policies to encourage saving include both tax reliefs, such as savings allowances and Isas, as well as direct support, such as Lifetime Isas and Help to Save, which top up savings with a Government ‘bonus’.
Rising interest rates mean that these policies are on track to cost the exchequer around £7 billion per year by the end of 2023/24, in terms of foregone tax revenue and direct payments to households.
The Resolution Foundation’s report says that Isa rules in particular are heavily skewed towards helping richer households.
For working age adults, it says, close to a third of total Isa savings are owned by those in the top 10 per cent of families in terms of wealth.
Disparity: Close to a third of total Isa savings are owned by those in the top 10% of wealthiest families, according to the Resolution Foundation
In total, Isas are set to cost the Government £4.3 billion per year in foregone tax revenue by the end of 2023/24 as interest rates rise, according to the think tank.
It’s a similar picture for Lifetime Isas, which are targeted at aspiring first-time buyers or pension savers under the age of 40.
Roughly half of the £670 million of Lisa tax breaks are estimated to be going to the top five richest households.
Even the personal savings allowance, which affords a £1,000 tax free allowance to basic rate taxpayers and £500 allowance to higher rate taxpayers came under scrutiny.
The authors of the report note that while savings allowances are progressive, 41 per cent of the £1.3billion of foregone tax revenue goes to the richest tenth of households, reflecting their far higher levels of saving.
Those with very high levels of Isa savings tend to earn at least £100,000 per year, according to the Resolution Foundation report
The report warns that since 1980, Britain has had the lowest overall savings levels of any G7 country in four of every five years.
This is a particular problem for low-to-middle income households, with half of households typically having £3,000 or less 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.
Scant savers: Britain has one of the worst savings records of any G7 country, the report says
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.
However, 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 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.’
