Chancellor Rachel Reeves faces the potential of significantly reducing the UK stock market’s value with even minor adjustments in the forthcoming Autumn budget, caution financial experts.

According to analysis by investment platform IG, a modest two-percentage point rise in both dividend and capital gains taxes—often perceived as straightforward targets for increasing tax revenue—could lead to a £4 billion drop in the FTSE’s value.

Amid warnings of these tax changes, there are also concerns that the Chancellor might reduce the tax-free pension lump sum. Currently, this provision allows individuals to withdraw 25 percent of their pension funds upon reaching the age of 55.

This uncertainty has already sparked a rush among people to access their pension lump sums, driven by fears that they might lose the opportunity, even if they lack a clear strategy for utilizing or managing the funds.

IG warns that cutting the tax-free lump sum could severely impact pension contributions. They predict that lowering the maximum allowance to £50,000 could collectively decrease annual pension contributions by £800 million. Even if the allowance is reduced to £100,000, contributions are expected to fall by £300 million each year.

It said a reduction in the lump sum maximum allowance to £50,000 could reduce annual pension contributions by a collective £800million, while a reduction even to a £100,000 allowance would see contributions fall by £300million each year.

IG says changing these taxes risks undermining the Government’s aim to promote a culture of investing in the UK

Currently, over-55s can withdraw up to a maximum of £268,275 when they take their lump sum from their total pot.

Michael Healy, UK managing director at IG, said: ‘The Government has been clear about its ambition to shift the UK away from a savings-first mindset and encourage more Brits to invest, supporting the stock market and growing their wealth.

‘That goal would be seriously undermined if any of the tax areas we’ve highlighted are targeted in next month’s Autumn Budget.’

The Chancellor will unveil the Autumn Budget on 26 November, with the Government hoping to fill a hole in the country’s finances worth tens of billions of pounds.

IG is calling for the Government to leave the pension tax-free lump sum intact, and says dividend tax should be held at its current £500 tax-free level, then 8.75 per cent for basic rate taxpayers, 33.75 per cent for higher rate payers and 39.35 per cent for additional rate taxpayers.

Capital gains tax, it says, should be kept at 18 per cent for the basic rate, and 24 per cent for higher rate payers, with the annual allowance fixed at £3,000.

Last year, rumours swirled that Reeves would hike capital gains tax, speculation that turned out to be true as the Chancellor upped rates on selling shares to 18 per cent for basic rate taxpayers and to 24 per cent for higher rate payers.

IG says changing these taxes risks undermining the Government’s aim to promote a culture of investing in the UK.

Healy added: ‘If we want to build a nation of investors, we cannot make it less attractive to invest – whether that’s in an Isa, outside of an Isa, or in a pension.

‘We’re asking the government to keep their hands off our investments: no raids on pensions, no hikes to dividend tax, and no increase to capital gains tax. Britain needs long-term investors, not short-term tax grabs.’

Recent reports suggest that Rachel Reeves could also be gearing up to reduce the cash Isa allowance in the coming Budget, with the Chancellor said to be considering halving the allowance to £10,00 from its current £20,000 level.

IG says the Chancellor should consider scrapping the Isa altogether to further promote investing for UK savers.

The platform warned that a majority of savings accounts don’t beat inflation, therefore the Government should not incentivise people to hold more than £12,500 in cash.

Last year, almost ten times as many cash Isas were opened compared to stocks and shares Isas.

DIY INVESTING PLATFORMS

AJ Bell

AJ Bell

Easy investing and ready-made portfolios

Hargreaves Lansdown

Hargreaves Lansdown

Free fund dealing and investment ideas

interactive investor

interactive investor

Flat-fee investing from £4.99 per month

InvestEngine

InvestEngine

Account and trading fee-free ETF investing

Trading 212

Trading 212

Free share dealing and no account fee

Affiliate links: If you take out a product This is Money may earn a commission. These deals are chosen by our editorial team, as we think they are worth highlighting. This does not affect our editorial independence.

Compare the best investing account for you