Financial adviser company, Salisbury House Wealth, said the Treasury would likely be looking for ways to increase tax receipts to cover huge coronavirus-driven public spending measures. In the Summer Statement on July 8, the Chancellor introduced further measures, including cuts to VAT and Stamp Duty.

One possible way of raising tax receipts would be to cut the level of tax incentives available on savings and investments.

The use of tax incentives is critical for individuals who want to maximise the value of their savings and investments. Incentives available 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 while 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.

‘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.’

Encouraging individuals to make investments by offering tax reliefs also provides an important source of funding for businesses. Through the purchase of funds or direct purchases of shares, individuals provide a significant slice of the equity financing for businesses.

Data from the ONS shows UK individuals own 13.5% of the value of all UK quoted shares.

Tax incentives have also been important in encouraging private investors to fund smaller, high-risk businesses through VCTs and through the Enterprise Investment Scheme (EIS).

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 in comparison to previous years, is partly 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. This follows the introduction of more stringent rules in 2017 on what type of business qualifies for investment under the scheme. Tax benefits gained on EIS-qualifying investments fell 3% to £580m last year, down from £600m the year before.

Holmes added: ‘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.’

Further reading:

Summer Statement: Chancellor offers job funding, VAT cuts and eat out discounts