Tax incentives on savings and investments hits ‘record’ high

Tax incentives granted on savings and investments in the UK hit a “record” high, rising by 3% to £25.6bn in the last year, according to Salisbury House Wealth. 

The financial advisor said the Treasury will now “likely” look to increase tax receipts to cover coronavirus-driven public spending measures, which may result in cutting the level of tax incentives available on savings and investments. 

The use of tax incentives is “critical” for those who want to maximise the value of their savings and investments, the group said, adding that available incentives include tax relief on pension contributions, Individual Savings Accounts (ISAs) and Venture Capital Trusts (VCTs).

The largest tax incentives gained by individuals last year were £21.2bn in tax relief on pension contributions and £3.3bn on ISAs. 

Tim Holmes, managing director at Salisbury House Wealth, said: “Tax incentives can have a very powerful effect on driving savings growth so savers need to make sure that capitalise on them whilst they are still available.

“Although cutting tax incentives on savings and investments could be an easy target as the Treasury looks to increase tax receipts, the Government needs to exercise caution.” 

He added: “The constant chipping away at tax incentives, particularly on pensions, undermines the attractiveness of savings to middle earners as well as high earners. 

“It risks deterring individuals from saving enough for their retirement which could be detrimental further down the line.” 

Between 2017/18 and 2018/19, there was an 8% increase in tax benefits granted on savings and investments. The slowdown of growth in the last year was in part due to the cut in the maximum amount someone can pay into their pension each year tax free. 

The reduction in tax benefits on investments through EIS has also contributed to the slowdown. Tax benefits gained on EIS-qualifying investments fell 3% to £580m last year, down from £600m the year before. 

Holmes said: “It is important that individuals do not base their investment decision making purely on whether that kind of tax relief is available. Tax reliefs should be secondary to the overall investment performance expected. Don’t let the tax savings tail wag the dog.”