Swapping sticks for carrots to encourage investing

On the face of it, the Chancellor’s autumn Budget focused on a number of relatively small measures. But looking at the detail it signals a significant change of direction in one policy area in particular.

Various governments, and the regulator, have long been concerned that too many people are holding their savings in cash and passing up the potential benefits of investing. It’s undeniable that in the longer term savers who leave their money in cash forego stock market gains. And a government keen to drive growth wants that cash being used to help stimulate the economy.

No change on cash ISAs

At the last Budget then-Chancellor Rachel Reeves announced that the cash ISA limit would be reduced to £12,000 for anyone under 65 from April 2027, with other anti-circumvention measures announced on ‘cash-like’ investments in stocks and shares ISAs. There are many reasons why that might not encourage more investment, not least that people may have perfectly valid reasons for keeping savings in cash, such as ease of access or zero tolerance for short-term risk. Whether that was what swayed her successor John Healey, or whether it was a consolation for the banks as he increased taxes on their profits by a further 3%, the reduction in the limit has been scrapped. 

Incentives to invest

The Chancellor’s approach appears to be more carrot than stick when it comes to encouraging people to invest in the stock market, and to that end there are a few carrots on offer. We already have the industry’s ‘Invest for the Future’ Savvy the Squirrel campaign, if describing a squirrel as a carrot isn’t mixing a metaphor too far. It’s now been announced that there will be a new ISA incentive, to be developed with the industry, for people investing in stocks and shares ISAs for the first time. There are no details as yet, but it’s being mentioned in the same breath as targeted support, which indicates the potential target market.

Further encouraging people to save will be tweaks to the existing LISA, to ease the pain for those wanting to purchase a house worth more than £450,000 and who were put off by the penalties of doing so, and a new First Time Buyer ISA with a focus solely on property, again with a government bonus.

Tax on savings and property income

If there’s any doubt about the Chancellor’s intent, he clearly stated that he’s looking for an ‘additional contribution’ from those with taxable income from assets. In last year’s Budget Rachel Reeves increased the rates of tax on savings and property income by two percentage points across all tax bands from April 2027. This year her successor announced he would be increasing these rates by a further two percentage points from that date.

But the extra savings and property tax rise leaves dividends alone. So from April 2027 the tax gap between interest or rent and dividends widens, which matters when choosing between income sources and wrappers. But there’s one important point to note - savings and dividend income are taxed at UK-wide rates; the new property income rates apply in England, Wales and Northern Ireland. Scottish property income will be treated differently. As with the £100 payment to help those in Council Tax bands A-D with fuel bills, the Scottish government will need to work out how to respond.