Fidelity urges Chancellor to reinstate dividend tax credit for equity ISAs

From April 2004, investors lost the ability to reclaim a tax credit on dividends from shares held within an ISA.

The saving to the government from this measure was estimated to have been around £200m a year - a drop in the ocean in the context of recent events - but the negative impact on Britain's savings culture has been much greater than this.

Having been positive since the launch of ISAs in 1999 (and before this in the form of PEPs), ISA sales were negative in 16 out of 19 quarters between April 2004 and the end of 2008. Over that period redemptions of ISAs and PEPs outstripped new sales by a cumulative £6bn as savers decided that ISAs were no longer a worthwhile tax-planning tool, especially for basic-rate taxpayers.

Figures from HMRC show that in 2004/05, the first year of the new legislation, £7.5bn was invested in ISAs, less than half the £16.1bn invested in the 1999/00 tax year. The numbers of subscribers to ISAs fell over the same period by 1.9m from 4.57m to 2.67m. Subscriptions had not recovered by 2007/08 when 3.23m people subscribed a total of £10.4bn into ISAs.

As the largest manager of equity ISAs, Fidelity is calling on the Government to re-instate the dividend tax credit. Both the Chancellor and the Prime Minister have indicated that this year's Budget will focus on the plight of savers who have borne the brunt of moves to reduce the cost of borrowing in response to the credit crunch and subsequent recession.

Fidelity estimates that the re-introduction of the dividend tax credit could increase the returns of existing savers by up to 13% over 10 years and would furthermore encourage new saving as well.This would contribute to reversing the recent collapse in Britain's savings rate and be in line with the Government's stated policy of encouraging people to take greater personal responsibility for their financial security.