Isabella Galliers-Pratt, Senior Investment Director at Rathbones, outlines what the Budget announcements could mean for investors.
Higher savings tax increases the cost of holding cash
“The decision to increase tax on savings income to 24%, 44% and 49% from April 2027 makes holding large amounts of cash on deposit increasingly unattractive, particularly for higher and additional-rate taxpayers.
“Cash will always have an important role in providing liquidity, but the tax changes significantly alter the equation for money held beyond immediate needs. For an additional-rate taxpayer facing a 49% rate on taxable savings income, a 4% savings rate would deliver just 2.04% after tax.
“For those holding substantial excess cash, that growing opportunity cost will become increasingly difficult to ignore.”
Looking beyond cash
“For money that is not needed immediately, investors may want to look more closely at alternatives, including short-dated, low-coupon gilts. While the coupon is subject to income tax, any capital gain on a gilt is generally free from capital gains tax for individual investors.
“At current yields, some short-dated, low-coupon gilts can offer a post-tax return of more than 4% for an additional-rate taxpayer. Once the 49% savings rate takes effect, a savings account would need to pay more than 8% gross to produce a comparable net return.
“The message is not that people should abandon cash. It is about distinguishing between money needed for emergencies and short-term spending, and substantial excess cash that could potentially be working harder elsewhere.”
Starter ISA could help create a new generation of investors
“A Starter ISA could be a much more effective way of creating a new generation of investors than simply trying to push people out of cash. The real barriers to investing are often confidence, understanding and fear of losing money, rather than a shortage of tax-efficient products.
“The detail will matter, but a meaningful incentive to make that first investment, alongside the right education and support, could help turn more savers into long-term investors. That could take the form of a government top-up on an initial investment, for example, giving people a tangible reason to take that first step.
“The focus should be on making investing feel accessible and worthwhile, rather than simply making cash less attractive.”
Stamp duty reform could give UK shares a shot in the arm
“One of the more encouraging takeaways from the Budget is that the Government is actively considering cutting stamp taxes on UK shares.
“At 0.5% on most share purchases, the tax looks increasingly anomalous in a world where capital moves across borders at the touch of a button and major competing markets such as the US have no equivalent general stamp duty.
“That friction matters. Overseas investors now own almost 59% of UK quoted equities, while UK pension funds own just 1.6%. At a time when Britain is trying to revitalise its capital markets, imposing an additional cost on buying UK companies makes little sense.
“Removing or reducing that cost could improve liquidity, make UK equities more attractive to global investors and provide a meaningful boost to a market that has spent too long fighting for capital. It is a relatively small lever that could have a disproportionately positive impact.”
