Savers and investors benefit from various tax credits and incentives aimed at promoting smarter financial decisions. For instance, the pension contribution tax credit and the £20,000 ISA allowance have remained untouched by government alterations, even though they cost the Treasury hundreds of millions annually. Recent estimates indicate that tax credits for pensions reach £70 billion each year.
However, there’s a less transparent aspect of this: the government is quietly reaping gains from individuals who take risks in the stock market. This might not be obvious to everyone.
The recent hikes in tax rates generated £500 billion from savings and investments in the past tax year, largely due to adjustments in tax-exempt allowances. People are saving money by investing more, which in turn fosters economic growth.
You lost tax reduction
Interest and profits from savings and investments within ISAs are exempt from capital gains tax (CGT) and income tax. Yet, the yearly £20,000 cap has been stagnant since 2017 and is set to remain unchanged until 2030, saving the government around £605 million annually.
Individuals utilizing the full allowance and holding non-ISA assets could face multiple taxes: a stamp tax when buying stocks, taxes on dividends, CGT upon selling, and inheritance tax upon passing.
The former government reduced the exempt amount for capital gains considerably, from £12,300 in 2021 down to £3,000, while lowering dividend allowances from £2,000 to £500. In April, a new Labour government implemented an 18% CGT rate for base taxpayers and 24% for higher earners, while dividend taxes stand at 8.75% for base rate taxpayers and 33.75% for higher earners.
• One year of work costs money
Investors purchasing UK stocks must pay a 0.5% stamp duty, generating £4.3 billion in tax revenues last year. The Sunday Times has advocated for the elimination of stamp duty to aid in revitalizing the UK stock market.
Official statistics reveal that the government collected £25.5 billion in CGT, inheritance tax, and stamp duty on shares in 2024-25, with projections reaching £44.9 billion by 2029-30.
The interest that cash savers can earn before being taxed is capped at £1,000 for basic taxpayers and £500 for higher rate taxpayers, with this limit unchanged since its introduction in 2016. Additional taxpayers receive no allowance.
Taxes from dividends and savings interest contributed £24.2 billion from 2024 to 2025, accounting for 7.8% of income tax receipts. If this trend continues, taxes on these assets might yield £31 billion by 2029-30, potentially pushing overall wealth tax to around £76 billion annually by the decade’s end.
Mixed Messages
During a speech at London’s Mansion House, Prime Minister Rachel Reeves introduced a range of policies, urging pension funds to invest more and promoting private UK company investments as well as campaigns to highlight the benefits of investing.
She stated, “For too long, we’ve portrayed investments in a negative light.”
Maximilian Bierbaum from New Financial remarked that while the government wants to enhance retail participation in capital markets, the mixed signals make it confusing, especially after canceling a planned retail sale of NatWest last July.
Another review regarding the state pension age was released recently, but the Prime Minister’s intention to impose inheritance tax on pension funds was confirmed as well.
This is particularly concerning given that more pensioners are likely to pay taxes on their retirement savings due to a freeze on income tax thresholds that’s been in effect since 2021 and is expected to last until at least 2028. About 9.28 million pensioners are projected to pay income tax this year, including approximately 979,000 high-rate taxpayers.
Beginning in April 2027, pensions will be considered part of an estate for inheritance tax, meaning that if savings pots are left to anyone other than a spouse or civil partner, up to 40% could be taken. Additionally, withdrawals made after age 75 will also incur income tax.
One can pass on assets of £325,000 free from inheritance tax, or £500,000 if the main home is left directly to descendants, though exceeding these limits incurs a 40% tax.
David Gibb, a wealth manager at Quilter Cheviot, noted that the recent tax changes have resulted in increased complexity for savers and investors.
• Family faces nightmare of deficits on inheritance tax on pensions
I’ll hit a squish
Investors should ideally hold stocks and shares within ISAs, where adults have a £20,000 yearly allowance that can be allocated between cash and investments.
The Prime Minister was rumored to consider capping cash savings within this allowance to encourage more investment, but this idea has faced significant backlash from the industry and is postponed until the autumn budget.
Within an ISA, investors don’t deal with CGT on investment growth or taxes on dividends and savings interest, but the amounts will form part of one’s estate for inheritance tax purposes.
If the ISA limit has been reached, maximizing pension savings can be a tax-efficient route. Pensions offer CGT exemptions and income tax relief on contributions, with savers allowed to contribute up to £60,000 annually and withdraw a 25% tax-free lump sum after age 55.
What experts say
Daniel Herring from the Center for Policy Research commented:
“CGT serves as a deterrent for investment, and by extending inheritance taxes to non-residents, wealthy individuals are fleeing abroad to avoid tax implications, leading to diminished investment in the UK.”
Bank of England researcher Alex Kontoghiorghes reflected on changes implemented in 2013 that enabled companies to invest in listed firms on the Alternative Investment Market (AIM). He found that it eased capital raising for companies and also enhanced employee wages. “Adjusting investment tax levels redirects capital flow towards certain assets,” he explained.
Research by interactive investors indicates that abolishing stamp duty could lead to 72% of investors increasing their investment in UK stocks, while only 2% might invest more if cash ISA allowances are reduced. Previous studies by the Centre for Policy Research and consultant Oxera suggested that removing stamp duty from UK stocks could spur economic growth by up to 0.7% to 4%, potentially generating £600 million more than costs incurred.
Bierbaum stated, “It’s absurd that UK investors are taxed on shares from AstraZeneca or BP but not when purchasing shares from Nvidia or Apple. They face penalties when trying to invest in the UK economy.”
