What Is the British ISA and How Does It Work?

With Britain’s economy underperforming most of its peers, the government has been casting around for ways to boost investment. Its latest idea has echoes of the “Buy British” appeals to patriotic consumers in the 1930s. The “British ISA,” unveiled by Chancellor of the Exchequer Jeremy Hunt Wednesday, is designed to channel more funding into UK companies by giving high earners a tax incentive to invest their money in local stocks. Investment advisers are warning that buying UK stocks that have historically underperformed will hurt savers and won’t address weak productivity and lackluster innovation. So what is the British ISA exactly, and what are its benefits and potential downsides?

A British ISA is a savings account exempt from taxes and invested exclusively in UK equities. Customers will be able to put a maximum of £5,000 in the account annually, and the money will be invested in a range of British companies. Current ISAs offer a place to park savings of as much as £20,000, without paying taxes on the interest. The new British ISA pushes that limit to £25,000. Most people don’t max out the existing £20,000 cap. But for those who do, the extra £5,000 is an added bonus. The new ISA could replicate the current framework, with people able to choose between so-called cash ISAs — which are similar to savings accounts — and investment ISAs, where the money is invested in stocks and shares, usually over a fixed term during which you face a penalty for withdrawing the funds. Currently most Britons pick cash ISAs, as they offer good liquidity, albeit with lower returns.