Why we are backing the British ISA
The Chancellor’s proposal of a new £5,000 ISA allowance has the dual objective of promoting savings while also revitalising the health of the UK capital markets. We strongly believe this is a symbolic and important first step towards helping the UK listed market, and its vast contribution to the UK economy and UK taxpayer.
The importance of UK-listed equities to the UK economy
The health of the UK listed equity market is of huge importance to the UK economy and its people. We estimate these companies employ more than three million people across the UK with nearly half employed in small and mid-cap companies1,2.
The contribution of UK listed PLC to the tax take is vast through direct taxes (corporation tax, VAT, duties, levies, rates, employee NIC), collected taxes (PAYE, VAT) and indirect taxes (stamp duty, dividend income and CGT). PWC’s survey3 of the 100 Group, including most FTSE 100 constituents and several large UK private companies, alone shows a total tax contribution of £90bn last year. This made up 10% of total government receipts and was comprised of £29bn in direct tax and £61bn in collected tax. Separately, it has been estimated that small and mid-sized quoted companies contributed an additional £25bn in taxes for 2020/20214. Further indirect taxes include capital gains tax receipts on UK-listed shares of £2bn, tax on dividend income of c£100bn and stamp duty on shares of over £3bn5. Beyond this significant contribution to public finances, capital investment by these companies topped £25bn and R&D expenditure reached £12bn in 2023.
Furthermore, most companies listed in the UK retain their headquarters and senior team members here and support an ecosystem of service providers including financial advisors, accountants, lawyers, PR specialists, remuneration consultants and recruitment specialists among others, whose contributions are over and above those listed here. In short, UK-listed equities are vital to the economic growth of the UK, employment and government tax receipts.
The perpetual spiral
This persistent discount has meaningful knock-on effects. Fewer companies choose to list on an index where their company is less valuable – demonstrated by the 15% reduction in FTSE All Share-listed companies over the past five years. This persistent valuation discount has led to a higher cost of capital meaning it is harder for companies to raise capital to survive the tough times and to grow in the good. More broadly, it is harder for management teams to execute growth strategies, including retaining talent, amid a persistent de-rating. As fewer companies list and the growth of listed companies is hampered, a downward spiral is created, reducing the chance of future listings, accelerating more companies being taken private and depressing liquidity.
How the British ISA stands to help
It is against the backdrop that the government has proposed the British ISA. The new £5,000 allowance, in addition to the existing ISA allowance, will provide a new tax-efficient savings opportunity for people to invest in the UK, while supporting UK companies. The government is using a tax break to encourage more people to invest in the UK stock market with the dual policy goal of improving the health of the UK listed equity market and encourage saving. As we see it, the key benefits are:
| 1. | Higher inflows into UK-listed assets Persistent UK stock market outflows are the primary reason why UK shares trade on a valuation discount to those overseas. Investors have pulled £50bn from UK-listed equity funds since 20157. A key benefit of the British ISA is that it will help drive capital into UK companies. Of the 1.6 million people who contributed their full ISA allowance in 2021, 210,000 people had incomes over £100,0008. Were 20% of these 1.6 million to use their £5,000 British ISA allowance the annual flow into the UK stock market could be £1.6bn per annum. This would meaningfully help the UK listed space with all of the positive impacts on UK economic growth, employment and government tax receipts. |
| 2. | Clear governmental support for British companies This sends an important message that the government is ready to back British companies. It is part of a broader package to address the health of UK listed markets, including encouraging more domestic investment by pension funds and reforming regulation associated with listing in the UK. |
| 3. | A boost to UK equity weightings Many wealth managers have been reducing their UK equity weightings. Were the £5,000 British ISA to be blended with the £20,000 existing ISA monies invested 100% overseas, the UK weighting would be 20%, significantly above the low UK equity allocation levels UK private wealth managers are driving at. As reference, the PIMFA benchmark for a conservative portfolio has UK equity allocation at just 10%. |
| 4. | Encouraging UK retail ownership of UK businesses The British ISA would draw attention to the current state of UK domestic share ownership. Foreign ownership consistently accounts for between half to two-thirds of UK shares9. The NatWest share sale later this year will put a further spotlight on domestic share ownership. |
| 5. | Improved liquidity UK markets have seen a steady decline in liquidity which policies such as these should address. |
| 6. | Benefits to the UK taxpayer The government is using a tax incentive to drive investment into UK listed companies rather than see that benefit lost to companies overseas. As outlined above, the health of the UK equity market could benefit and, with it, government tax receipts, UK employment and growth. More investment in the UK listed space is a positive step towards addressing the persistent UK equity valuation discount. Closing this discount should help turn around the trend of fewer companies listing in the UK and reduce the elevated cost of capital which is hampering the growth of existing listed companies both in terms of their ability to raise capital for acquisitions but also execute their growth strategies more broadly. It is a positive intervention that should be supported broadly across the UK economy. |
Addressing some of the concerns
While tax incentives to take part in one’s own listed equity market are not unusual and currently exist in a number of geographies, the proposal has drawn opposition within the UK. We find these arguments unconvincing and unnecessarily cynical:
| 1. | Uptake and impact There is speculation that uptake will be limited and the positive impact on UK companies negligible however, this completely misunderstands the scale of the problem. When the entire stock market is trading on a meaningful discount and the UK has seen 60 months of consecutive outflows, no unique policy will be able to single-handedly turn the tide. It is a much-needed start and part of a package of reforms, including domestic pension ownership and listing regulation changes that could, over time, provide a solution. It is also a message of intent that the government recognises the issue at hand and stands ready to respond. If the impact is not sufficient, it can be tweaked in future; the allowance level raised, other ISA levels reduced, IHT removed, investments topped up etc. but we must take a meaningful first step now. |
| 2. | Savers’ outcomes Some highlight savers have done better in recent years by investing overseas and that incentivising them to invest domestically will be relatively negative for them. However, while recent performance in the UK has been tougher, over the longer term, domestic shares have fared better. For example, the FTSE 250 Index has outperformed the overseas MSCI World Index since its inception in 1992. On a conceptional point, if the UK stock market dwindles, tax breaks such as these will eventually become unaffordable and there will be no subsidy for investing at all, domestically or overseas. Put another way, if the top 100 UK-listed companies alone contribute 10% of the entire UK government tax receipts, it would seem odd to give tax breaks to lower the cost of capital of companies listed overseas, relatively making the UK stock market less attractive and hampering the very companies that help fund the tax break. Retaining taxpayer funded benefits in the UK should ultimately benefit the taxpayer. |
| 3. | Complexity Some commentators point to the complexity of the ISA landscape. However, with various flavours of ISA now available, the issue here is largely one of administration and message simplification, rather than outright opposition to the underlying proposition. Rather than complain about the complexity of the ISA landscape, we would welcome explanation of the benefit of the existing and new incentives to invest from these knowledgeable heads rather than the current dismissal of a positive step towards addressing a vital issue. |
The British ISA benefits the country, not just the savers
We believe the British ISA is the first, much needed positive step towards helping the UK listed market whose vast contribution to the UK economy and UK taxpayer is so important.
1. https://www.theqca.com/wp-content/uploads/2023/10/qca_punching_above_their_weight_report_2022_web_asset_62da6a3d9f352.pdf , page 10
2. https://www.pwc.co.uk/tax/assets/pdf/total-tax-contribution-100-group-2023.pdf , page 11
3. https://www.pwc.co.uk/tax/assets/pdf/total-tax-contribution-100-group-2023.pdf
4. https://www.theqca.com/wp-content/uploads/2023/10/qca_punching_above_their_weight_report_2022_web_asset_62da6a3d9f352.pdf , page 3
5. https://www.peelhunt.com/news-events/articles/uk-equity-markets-are-vital-but-need-to-be-revitalised/
6. Panmure Gordon, Panmure Equity Strategy Sector Note, 1 December 2023
7. Numis, UK Equity Mutual Fund February Update, 8 March 2024
8. https://www.gov.uk/government/statistics/annual-savings-statistics-2023
9. Ownership of UK quoted shares - Office for National Statistics (ons.gov.uk), Foreign investors own 66% of UK-listed shares, analysis shows | Stock markets | The Guardian
