The secret savings tax grab — and how to escape it

Times

2 days ago

Savers and investors get a range of tax breaks and incentives that are designed to encourage them to make smarter decisions for their wealth. Tax relief on pension contributions and the £20,000 Isa allowance have escaped government tinkering, despite costing the ­Treasury billions of pounds. Tax breaks on pensions cost £70 billion a year, the latest figures show.
But underneath all that, the government is sneakily taking an increasing share of the spoils made by those who risk their own money on the stock market. And you may not realise it.
A flurry of recent rate increases and cuts to tax-free allowances helped raise as much as £50 billion from savings and investments in the last tax year — just as the chancellor plans to nudge savers to invest more in a bid to boost economic growth.
Interest and returns made on savings and investments held in Isas are free of capital gains tax (CGT) and income tax. However, the £20,000 annual allowance has been frozen since 2017 and won't go up until at least 2030 — saving the government an estimated £605 million a year by that point.
Anyone who has used the full allowance and holds shares and other investments outside an Isa can end up being taxed as many as five times: income tax on your wages; stamp duty when you buy shares; tax on dividends; capital gains tax (CGT) if you sell; then inheritance tax when you die.
The amount of capital gains you can make before you have to pay tax was cut by the previous government from £12,300 in 2021 to £3,000 while the dividend allowance went from £2,000 to £500. In April the Labour government created a single 18 per cent rate of CGT for basic-rate taxpayers and a 24 per cent rate for most higher and additional-rate taxpayers. The rate of dividend tax is 8.75 per cent for basic-rate taxpayers and 33.75 per cent for higher and additional-rate taxpayers.
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Anyone buying UK shares has to pay 0.5 per cent stamp duty reserve tax, which netted the Treasury £4.3 billion in the last tax year. The Sunday Times has called for stamp duty to be scrapped as part of its Revive the City campaign to boost the UK's stock market.
The government collected £25.5 billion in CGT, inheritance tax and stamp duty on shares in 2024-25, according to official figures. The Office for Budget Responsibility expects the total to be £44.9 billion for 2029-30.
The amount cash savers can earn before being taxed on their interest is restricted to £1,000 a year for basic rate taxpayers and £500 for higher rate taxpayers and the allowances have not changed since they were introduced in 2016. Additional rate payers get no allowance.
Tax on dividends and savings interest raised £24.2 billion in 2024-25 (7.8 per cent of income tax receipts). If that percentage stayed the same, taxes on those two assets would raise £31 billion by 2029-30. In all, taxes of wealth could total as much as £76 billion a year by the end of the decade.
In a speech to City bosses at Mansion House in London, the chancellor, Rachel Reeves, unveiled a series of policies; from asking pension funds to invest more of savers' money into private UK companies, to an advertising campaign to promote the benefits of investing.
She said: 'For too long we have presented investment in too negative a light, quick to warn people of the risks, without giving proper weight to the benefits.'
Maximilian Bierbaum from New Financial, a think tank, said: 'The government rightly wants to widen retail participation in capital markets. But it is sending mixed signals: it cancelled the proposed retail sale of shares in NatWest in July last year which would have given retail investors a big opportunity to invest in a household name, and it has raised capital gains tax.'
Another review into the state pension age was announced on Monday, while the chancellor's plan to charge inheritance tax on pension pots was also confirmed.
This all comes at a time when more pensioners than ever can expect to pay tax on their retirement savings, thanks to the freeze on income tax thresholds that began in 2021 and is set to last until at least 2028. Some 9.28 million pensioners are expected to pay income tax this year, including 979,000 higher-rate taxpayers, up from 7.1 million in 2021-22, according to HM Revenue & Customs.
And from April 2027 pensions will form part of your estate for inheritance tax purposes, so if you leave your savings pot to anyone but your spouse or civil partner (who are exempt from inheritance tax), they could lose 40 per cent of it. If you die after the age of 75, they will have to pay income tax on withdrawals too.
You can pass on £325,000 of assets from your estate inheritance tax-free — £500,000 if you leave your main home to a direct descendant and your estate is worth less than £2 million. Any assets above those thresholds can be taxed at 40 per cent.
David Gibb from the wealth manager Quilter Cheviot said the recent stream of tax changes have left savers and investors 'grappling with a rising tide of complexity'.
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The first thing investors should do is to look to hold any stocks and shares in an Isa. Adults get a £20,000 annual allowance that can be split across cash and investment options.
The chancellor was said to be considered restricting how much of your allowance you can save in cash, to nudge more savers towards investing, but the plans led to a fierce backlash from the industry and have been put on hold until the budget in the autumn.
Inside an Isa you do not need to worry about CGT on investment growth, or taxes on dividends and savings interest, but they will still be part of your estate for inheritance tax purposes.
If your Isa allowance is already used up, you could make tax savings by maximising your pension saving. Pensions are also CGT-exempt and you get income tax relief on contributions. Savers can pay in up to £60,000 a year, and you can take a 25 per cent tax-free lump sum from your pot after the age of 55.
Daniel Herring from the Centre for Policy Studies, a right-leaning think tank, said: 'Wealth taxes are more damaging than taxes on income and consumption. They stop people making decisions that will lead to higher economic growth.
'CGT acts as a deterrent to investment, while extending inheritance tax to non-doms has led very wealthy people to move overseas to avoid it, taking their investments and capital with them.'
Alex Kontoghiorghes, a researcher at the Bank of England, looked at what happened after the Isa rules changed in 2013 to allow investment in companies listed on the Alternative Investment Market (Aim). He found that companies were able to raise money more easily, because investors could buy into them more cheaply, which reduced their capital costs and permanently increased their share prices and dividends. Aim firms also invested more in their businesses and increased workers' pay. 'Changing the level of investment taxes incentivises capital flows into certain assets,' he said.
Research by Interactive Investor suggests that 72 per cent of investors would invest more in UK stocks if stamp duty was abolished but just 2 per cent would invest more if the cash Isa allowance was cut. Last year the Centre for Policy Studies and the consultancy Oxera suggested that abolishing stamp duty on UK shares could boost the economy by up to 0.7 per cent and share prices by 4 per cent. It said it could actually raise £600 million more for the government than it would cost.
Bierbaum said: 'It's quite frankly ridiculous that an investor in the UK pays stamp duty when they buy a share in AstraZeneca or BP but not when they buy a share in Nvidia or Apple. We penalise investors when they want to invest in the British economy.'