Speculation has been mounting over the possible tax increases that the Government might impose in order to cover massive coronavirus-driven public spending.
There has already been rumours that cuts to pension tax relief for high earners is being looked at by the Treasury, as well as an increase in capital gains tax to more closely match income tax rates. However, there is a chance that other tax incentives could also be in the firing line.
Tax incentives on savings and investments play an important role in encouraging individuals to save and invest for the future. Research that Salisbury House Wealth undertook shows that last year, tax incentives granted to individuals related to savings and investments hit a record high of £25.6bn, up 3% from £24.8bn the year before.
Given that the Government is looking to raise tax receipts to cover for coronavirus-driven spending, it is very important that savers make use of tax incentives whilst they are still available.
Tax relief on pension contributions was the most widely used tax incentive last year at £21.2bn. Another major tax incentive used by savers last year was on ISAs, which provides £3.3bn in tax savings.
Commentators have suggested the Government should be cautious about making cuts to tax incentives as this could deter individuals from saving. In particular, if pension tax reliefs are cut, this could have a determinantal impact on the amount people save for the future.
Cuts to tax incentives could also have an indirect effect on funding for businesses. For example, savers provide equity financing for businesses through the purchase of funds or direct purchases of shares. The holdings of individuals account for 13.5% of the value of UK quoted shares, according to the ONS.
Tax incentives on VCTs and the Enterprise Investment Scheme (EIS) are also key in encouraging private investors to fund smaller, high-risk businesses.
The most suitable investment portfolio differs for each individual depending on their savings goals and risk appetite. This means individuals should not base decisions solely on what tax reliefs are available. However, making use of suitable, available tax savings can be very helpful in building wealth.
Read more from us on this topic in FT Adviser: https://www.ftadviser.com/your-industry/2020/08/13/tax-incentives-hit-record-high-at-25-6bn/