Poor policy design has failed to get Britain saving as rich individuals receive lion’s share of £7 billion of savings incentives

16 January 2023

Poor policy design has failed to encourage more families across the UK to save, 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 of distribution of savings across the UK, the impact of savings on families’ financial resilience, and whether key savings policies have helped more people to save more.

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 is a huge drag on 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 £7.3 billion per year by the end of 2023-24 in terms of foregone tax revenue and direct payments to households.

However, the report warns that these policies have failed to encourage more people to save, and that instead 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, 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 with close to half (47 per cent) of the £900 million of government support estimated to be going to the richest fifth of families, the authors warn that the government is likely to be providing support to some people who were likely to save 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. This may reflect the fact that many benefit recipients are simply unable to save, say the authors, but with 92 per cent of monthly Help to Save deposits at the maximum value of £50, people are clearly keen to save as much as possible.

Taken together, the richest tenth of households are set to gain around £835 on average from these policies next year, around 20 times the gains received by the poorest tenth of households (£44). The average household is expected to gain around £260.

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 get more people saving.

To do this, Help to Save (which currently costs 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 more than £6,000 in savings.

The Chancellor should also cut waste by capping the total amount of ISAs savings that are tax-free at £100,000. This policy is expected to raise around £1 billion per year by the end of 2023-24, and only affect a very small minority of savers.

At a time when around 750,000 have no savings at all, it cannot be right that the government is offering tax relief to 1.5 million people with over £100,000 of savings in ISAs alone, say the authors.  

Molly Broome, Economist at the Resolution Foundation, said:

“Britain has a long tradition of struggling to save. This lack of financial resilience has been exposed during the cost-of-living crisis, as families build up debts and fall behind on bills.

“Successive government have tried – and failed – to address this problem. Our myriad of savings policies are set to cost the Government £7 billion next year but are poorly targeted, offering unnecessary tax breaks to people with over £100,000 in savings, while 750,000 families have 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.”

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.”

Download the report