Proposals to introduce a British ISA risk causing more harm than good and damaging the successful ISA brand, according to AJ Bell.

Under plans set out by the government before the general election was called, Brits would be handed an extra £5,000 of ISA allowance through the British ISA, restricted to as-yet-undefined ‘UK’ investments.

Chancellor Jeremy Hunt announced the launch of the new British ISA and changes to ISA allowances as part of a raft of new measures introduced in his Spring Budget in March.

He said British savers will receive an additional £5,000 annual tax free British ISA allowance, pushing up total ISA investment to £25,000 for investors who use it.

In its response to the consultation which is due to close on 6 June, AJ Bell warned the proposal will be ineffective in boosting UK capital markets and potentially add significant complexity to the ISA landscape.

The firm also called for the merging of cash and stocks and shares ISAs, as a first step for the next government towards wider ISA simplification.

Meanwhile its research pointed to a risk of consumer harm if any investors chose a British ISA over a stocks and shares ISA for their first subscription of a tax year.

According to the survey, more than a third (35%) of investors said they would choose the British ISA for their first subscription of the tax year.

In contrast, just 26% said they would choose a stocks and shares ISA while 43% said they didn’t know which they would choose, pointing to the confusion extra complexity will inevitably create.

Tom Selby, director of public policy at AJ Bell, said: “While Rishi Sunak and Keir Starmer are focused on finding political dividing lines ahead of the general election, the Conservatives and Labour are pretty much in lockstep over the need to boost UK capital markets as part of wider efforts to increase productivity.”

He said that as investors tend to naturally favour UK investments, it would be simpler to increase the overall ISA allowance to £25,000, a move which would likely achieve similar results to a British ISA but without the extra complexity.

AJ Bell has campaigned for ISAs to be simplified by combining the best features of the existing six types into a single ‘One ISA’.

Mr Selby said: “As a first step, the next government should look at merging cash and stocks and shares ISAs. The move would make it simpler for investors to shift between cash and investments and move us towards a world where investments are simply a feature of ISAs, rather than a defining characteristic.”

• The research was based on a nationally representative survey of 2,000 UK adults carried out online on behalf of AJ Bell by Opinium between 7 and 10 May.