Outlook: A tax-free way to stem the Revenue's losses

Here is a test. You are the new Chancellor and your Permanent Secretary has just helpfully pointed out that the tax-free investment alternative promised in your election manifesto will cost the Exchequer squillions. It was bad enough that the tax foregone on personal equity plans and Tessas will be pounds 1.25bn this year, rising to pounds 1.7bn by the turn of the century. But did you know that your brand spanking new Individual Savings Account, aimed at low income earners has the potential to cost a lot more in tax revenues than PEPs and Tessas ever did. Gulp. What do you do? The answer came yesterday, when the Treasury wheeled out a hapless Paymaster General, Geoffrey Robinson, to explain the Government's new ISA to a sceptical audience.

Yes, the ISA will enjoy virtually identical tax incentives to existing PEPs and Tessas plus bolt-on goodies like instant access to a portion of the amount saved. But there will be one major difference: unlike existing PEPs, which allow maximum investments of up to pounds 9,000 a year and no limit over time, the ISA will have an annual cap set at pounds 5,000 and an upper ceiling of pounds 50,000.

One of the admirable purposes of ISAs is to stimulate savings among a far wider swathe of people than PEPs and Tessas ever reached with their appeal to better-off folk with money to save.

There is no doubt that many will be better off with an ISA, even if it is to the tune of just a few pounds.But we should not pretend either that this is an exercise designed solely to encourage poorer savers since the fiscal impetus behind the new savings schemes is to cap the amount the Revenue is losing from existing ones.

While poorer savers will get a better deal it will not make a jot of difference to the super-rich. They, like Mr Robinson, will continue to invest their riches in offshore trusts where no Chancellor can get his hands on them.

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