I’m a fan of investing in UK shares at any time, but especially right now. This year’s stock market crash has thrown up plenty of bargains for long-term investors who are happy to look beyond current turmoil. Now there’s another pressing reason to invest, and use your tax-free Stocks and Shares ISA allowance. It could help you escape the upcoming tax grab from Chancellor Rishi Sunak.
The Chancellor is popular today, as his furlough scheme has saved millions from unemployment, while Eat Out to Help Out has given the restaurant trade a much-needed boost. He won’t be as popular if he unleashes a £30bn-a-year tax raid in November’s budget, as reports suggest.
Fighting Covid-19 does not come cheap. The government borrowed a record £127.9bn between April and June to keep the country afloat. The national debt now stands at a mind-boggling £2tr. At some point, somebody has to pay. That point is likely to come in November. Buying UK shares today can head off some of the worst consequences.
Buy UK shares and save tax
The Treasury is said to be considering a number of options to raise tax, several of which will hit investors hard. One is to increase capital gains tax (CGT), to bring it in line with income tax rates. I think this change is particularly likely, as it will be marginally less painful (from a political point of view) than some of the other options.
If you invest inside a Stocks and Shares ISA, you do not have to pay any income tax on your returns, or CGT either. I’d recommend using as much of your £20,000 annual allowance as you can afford to invest in UK shares today, while they are still cheap after the stock market crash.
The Chancellor may also scrap or temporarily suspend the State Pension ‘triple lock’, which guarantees that pension income will rise in line with earnings, inflation, or 2.5%, whichever is higher. If that goes, it will increase the importance of investing in UK shares under your own steam.
Possibly a bigger worry for investors in UK shares is that Sunak will target pensions tax relief. This tops up your workplace or personal pension contributions by either 20%, 40%, or 45%, depending on your tax bracket.
Pension tax relief targeted
This idea has been floated again and again in recent years, but never made it into the Budget speech. That could now change. I could see Sunak reducing the benefit to 25% for all. So if you are a higher or additional rate taxpayer, you should consider taking advantage of this valuable sweetener today, to turbocharge your pension. Especially while UK shares are cheap.
As far as I can see, there is no talk of the Treasury targeting the £20,000 Stocks and Shares ISA allowance. This is already a hugely attractive way to invest in UK shares. If Sunak’s tax attack does happen, it will be even more appealing.
That gives you another reason to buy UK shares today, as building your retirement wealth by other means could prove harder.