The British Isa: does it pay to be patriotic with your savings?
Could your money be doing more to support the nation? That’s the question the Chancellor, Jeremy Hunt, levied at savers and investors with his Spring Budget with the launch of a new British Isa and new NS&I British Savings Bonds.
The British Isa is an extra Isa allowance that allows you to invest more tax-free, at a time when other tax-free allowances are falling.
But it can only be used for investing in British companies, many of which have struggled in recent years, leaving investors with a difficult decision.
NS&I's new British Savings Bonds also promise to support UK firms through a fixed-rate for three years.
Here we explain how both products work and if they're good for you – whether you're looking to support British businesses, or simply get the highest return.
What is the British Isa?
The British Isa (also referred to as UK Isa) is an extra £5,000 annual allowance, on top of the existing £20,000 you can put into Isas per year.
Like with all Isas, dividends and profits in the British Isa will be tax-free – but it can only be used for British investments.
What exactly this means will be part of a government consultation. It proposes including firms that are incorporated in the UK and listed or traded on UK stock exchanges.
Investment funds and investment trusts would have to be at least 75% invested in eligible firms. Bonds in UK firms and Gilts would be eligible.
The Chancellor has said he wants ‘to ensure British savers can benefit from the growth of the most promising British industries’.
But the current approach would eliminate firms such as ARM Holdings, a Cambridge-founded firm that designs semiconductors and whose share price shot up last year. It would be excluded because it is listed on the American NASDAQ exchange.
The consultation on the British Isa doesn’t close to responses until 6 June this year, so don’t expect it to launch any time soon.
- Find out more: what was in the Spring Budget small print?
Should you invest in Britain?
Yes – but judging by how fund managers invest, not much. Vanguard’s Global All Cap fund, for example, has just 3.6% of its holdings in the UK, compared to 61.9% in the US.
In recent years global (and particularly US) investments have performed far better than UK investments.
On 6 March, when the British Isa was announced, an investment into the UK stock market would have turned £10,000 into £16,469 over 10 years, compared to £31,207 from global shares, data from investment platform AJ Bell and FE Fund Info show.
Historical performance doesn't predict the future however, and AJ Bell says that UK firms can suit investors looking for an income.
Some FTSE 100 firms regularly pay impressive dividends and share prices are low by historical standards.
Just don’t go all-in on the UK. Diversifying your portfolio across different countries helps protect you from economic shocks.
Will the British Isa help the UK economy?
Very few people need the extra £5,000 Isa allowance. Just 15% of Isa savers added the maximum £20,000 in 2020-21 (the most recent figures available) and from the pandemic, when some people were able to put more money away.
Many investors already use their normal Isa allowance to invest in the UK. Investment platform Hargreaves Lansdown says 83% of its customers' shares are held in UK-listed firms.
But UK-focused funds are going through what AJ Bell has described as ‘a dark age’: £51bn was withdrawn in the past two years by regular UK investors, which it partly puts down the cost of living crisis, which the British Isa won’t fix.
Nor will the British Isa encourage foreign investors to invest in the UK, as it'll only be open to UK taxpayers.
There had been widespread calls for removal of the 0.5% stamp duty on UK listed-shares to encourage investment, but this wasn’t included in the Budget.
It’s also unclear whether many providers would offer the British Isa. PIMFA, which represents financial advisers, said it sees ‘very little appetite to offer such a wrapper’.
What about British Savings Bonds?
You won’t have to wait as long for NS&I’s new British Savings Bonds.
These will launch in April, offering savers a fixed rate for three years, on deposits between £500 and £1m, with savers’ deposits ‘invested back into supporting the UK’.
What hadn’t been revealed, at the time of writing, was the interest rate you'll get.
NS&I has said these will be ‘mid-market’ and the rates of a similar three-year savings account, NS&I’s Green Savings Bonds, doesn’t give grounds for optimism. These pay 2.95%, far below the top three-year fixed-rate accounts on the market.
It's also important to note that interest paid on British Savings Bonds are not tax-free. If it, added to any other interest you receive, exceeds your personal savings allowance you may have to pay income tax on it.
Unlike investments it's both easy and safe to keep all your savings in the UK – and you’re not restricted to NS&I.
While the biggest banks partly invest abroad, building societies mostly use deposits to lend on UK property and, being owned by their members and not listed on stock exchanges, don’t pay dividends that could end up going to investors based abroad.
- Find out more: best savings accounts 2024
