Tax on savings and investments raises billions while punishing savers

In the UK, recent tax policy changes and rate increases have led to a substantial increase in tax collected from savings and investments, totaling £50 billion in the last tax year alone. The government aims to encourage savers to invest more to spur economic growth, but the existing tax structures heavily burden those outside tax-friendly accounts like ISAs. Those investing outside ISAs face multiple taxes, including income tax, capital gains tax (CGT), and inheritance tax, making the investment landscape challenging for many. April 2024 marked the introduction of new rates for capital gains tax, with basic-rate taxpayers now subject to an 18% rate, while higher and additional-rate taxpayers face a substantial 24% rate. Meanwhile, taxes on dividends have been set at 8.75% for basic-rate taxpayers, escalating to 33.75% for higher earners. As more UK pensioners expect to pay taxes on retirement savings due to a freeze on income tax thresholds from 2021 until at least 2028, the situation for savers appears more challenging than ever. Moreover, significant changes that will affect inheritance tax for pensions, set to take effect from April 2027, have raised concerns among estate planners and savers alike. If individuals leave their pensions to anyone other than their spouse or civil partner, their beneficiaries risk losing 40% to inheritance tax, and those over 75 will have to deal with additional income tax implications on withdrawals. Such tax policies are under scrutiny, with various advocates and analysts urging the government to preserve tax breaks for responsible savers while promoting investment in the UK stock market. The recent discussions around abolishing stamp duty, currently set at 0.5% for UK shares, reflect a broader desire to enhance market liquidity and potentially boost the economy. Some estimates suggest that eliminating this tax could better support UK companies and raise government revenues, despite the initial loss of tax income from this levy. The debate continues, highlighting the tension between raising tax revenues and fostering a more vibrant investing environment for individual savers and the broader economy.