Business

UK stock market faces risks from proposed tax hikes and pension reforms

Wednesday, 22 October 2025 4:07AM UTC

Market experts warn that modest increases in dividend and capital gains taxes, along with pension reforms in the upcoming Autumn Budget, could significantly diminish the UK’s stock market value and investor confidence, amid calls to reduce stamp duty and reform ISA allowances.

Chancellor Rachel Reeves faces warnings from market experts that even modest tax changes in the upcoming Autumn Budget could significantly erode the UK stock market's value. Analysis from investment platform IG suggests that a two-percentage point rise in both dividend tax and capital gains tax (CGT) could slash about £4 billion off the FTSE, underscoring concerns that fiscal adjustments aimed at raising government revenue could simultaneously undermine investor confidence and market performance.

One particularly contentious area is the tax-free pension lump sum, which currently allows individuals aged 55 and over to withdraw up to 25% of their pension pot tax-free, capped at a maximum of £268,275. IG warns that reducing this lump sum—potentially to limits like £50,000 or £100,000—could collectively decrease annual pension contributions by hundreds of millions of pounds, directly impacting long-term savings and investment into the stock market. This comes amid a recent surge in lump sum withdrawals driven more by anxiety over potential policy changes than strategic financial planning.

The Chancellor’s strategy to shore up government finances, reportedly involving filling a multi-billion-pound fiscal gap, also includes revisiting dividend and capital gains taxes. Dividend tax, despite already facing sharp cuts in the tax-free dividend allowance—from £2,000 in 2017/18 to just £500 in 2024—is expected to further weigh on an estimated 3.7 million UK taxpayers. Dividend tax rates stand at 8.75% for basic-rate taxpayers, scaling up to 39.35% for the highest earners, and government revenues from these taxes are forecast to rise to nearly £1 billion by 2027/28. To mitigate the impact, tax experts recommend utilising tax-efficient tools like ISAs or pensions and strategies such as splitting income-generating assets between spouses.

Capital gains tax reform has been another focal point for the Chancellor. Last year, Rachel Reeves increased CGT rates from 10% to 18% for basic-rate taxpayers and from 20% to 24% for higher-rate payers, aligning these rates with those for property sales. These adjustments were projected to generate approximately £2.5 billion in revenue. However, recent HMRC data reveal a paradox: CGT receipts have declined—from almost £17 billion in 2022/23 to around £13.1 billion in 2024/25, and just £11.8 billion in the first half of 2025—suggesting that higher tax rates may be prompting behavioural tax avoidance or deferred asset sales, undermining anticipated Treasury gains.

The UK’s investment landscape shows a complex reaction to these tax increases. Notably, November saw a record £3.1 billion inflow into British equity funds after significant capital flight in October, signalling investors' attempts to rebalance portfolios and mitigate tax liabilities. Yet, analysts caution that without a major positive catalyst, sustained growth in the UK stock market remains uncertain.

Meanwhile, city leaders and investment platforms are lobbying the government to abolish the 0.5% stamp duty on share transactions, contending that this levy dampens investment appetite and detracts from the competitiveness of the London Stock Exchange. Industry voices including IG and major platforms such as AJ Bell and Hargreaves Lansdown argue that removing stamp duty could notably rejuvenate the market by attracting retail investors and enhancing liquidity. Some proposals extend to removing the duty within tax-advantaged accounts like ISAs and pensions, or at least for small and mid-cap stocks, in recognition of the UK’s currently low domestic equity investment relative to other major economies.

While the Chancellor reportedly is considering reducing the cash ISA allowance from £20,000 to £10,000, platforms like IG suggest more radical moves, including scrapping the cash ISA altogether, to encourage savers to move funds from low-yield cash accounts into equities, which historically offer better inflation-beating returns.

The broader concern raised by these intersecting fiscal measures is that they risk undermining the government’s declared ambition to cultivate a nation of investors. Michael Healy, UK managing director at IG, commented on the tension between tax revenue objectives and investment culture, highlighting the importance of maintaining tax incentives to ensure long-term wealth growth and support for the stock market.

In sum, while the government seeks to balance fiscal responsibility with growth, the current trajectory of increased taxation on dividends, capital gains, and restricted pension benefits may dampen investment enthusiasm, reduce pension contributions, and ultimately cost the UK market billions in value. The challenge lies in crafting policies that foster both fair taxation and a thriving investment environment, crucial for sustainable economic health.

📌 Reference Map:

Paragraph 1 – ^[1] (Daily Mail), ^[5] (Reuters)
Paragraph 2 – ^[1] (Daily Mail)
Paragraph 3 – ^[1] (Daily Mail), ^[2] (MoneyWeek)
Paragraph 4 – ^[3] (Reuters), ^[4] (MoneyWeek)
Paragraph 5 – ^[5] (Reuters)
Paragraph 6 – ^[6] (MoneyWeek)
Paragraph 7 – ^[1] (Daily Mail), ^[6] (MoneyWeek)
Paragraph 8 – ^[1] (Daily Mail)
Paragraph 9 – ^[1] (Daily Mail), ^[2] (MoneyWeek), ^[4] (MoneyWeek)

Source: Noah Wire Services

More on this

https://www.dailymail.co.uk/money/tax/article-15212179/Chancellor-risks-wiping-4bn-UK-stock-market-Labour-targets-pensions-CGT-dividend-tax.html?ns_mchannel=rss&ns_campaign=1490&ito=1490 - Please view link - unable to able to access data
https://moneyweek.com/personal-finance/tax/dividend-tax-squeeze-to-hit-record-3-7-million-people-how-to-protect-your-investments - In the 2024/25 tax year, the number of individuals paying dividend tax in the UK is expected to reach a record 3.7 million, up from 1.9 million in 2022/23. This surge results from sharp reductions in the tax-free dividend allowance—from £2,000 in 2017/18 to just £500 in 2024. The lower thresholds are pulling in an estimated 1.25 million additional taxpayers over two years. Dividend tax rates range from 8.75% for basic-rate taxpayers to 39.35% for additional rate payers. Basic rate taxpayers now account for a significant portion of those taxed, many facing these taxes for the first time. Government revenue from dividend taxes is forecasted to rise, with £450 million expected in 2024/25 alone, and up to £940 million by 2027/28. Tax experts recommend using tax-efficient vehicles like ISAs and pensions to shelter dividends from taxation. Splitting income-producing assets with a spouse and investing in high-risk but tax-sheltered funds like Venture Capital Trusts are also viable strategies. While further cuts to the allowance have been discussed, significant revenue increases are unlikely due to the already minimal threshold.
https://www.reuters.com/world/uk/uks-reeves-announces-rise-capital-gains-tax-most-assets-2024-10-30/ - The British finance minister, Rachel Reeves, announced an increase in capital gains tax rates for most assets from 10% to 18% for lower rates and from 20% to 24% for higher earners. These changes are expected to raise £2.5 billion. The new rates align with those for property sales, which remain at 18% and 24%. Additionally, capital gains tax on carried interest will rise to 32% from 28%. To support entrepreneurship, the lifetime limit for Business Asset Disposal Relief is maintained at £1 million, with the rate increasing from 10% to 14% in April 2025 and 18% in 2026-2027. The adjustments aim to promote growth, entrepreneurship, and ensure fairer taxation while maintaining the UK's competitive tax rates among European G7 economies.
https://moneyweek.com/personal-finance/tax/capital-gains-tax-receipts-changes-backfire - Capital gains tax (CGT) revenues have fallen significantly despite rate increases introduced by Chancellor Rachel Reeves in the 2024 Autumn Budget. HMRC figures show CGT receipts dropped from nearly £17 billion in 2022/23 to £13.1 billion in 2024/25, with just £11.8 billion collected in the first half of 2025 compared to £13.5 billion during the same period the year prior. The Chancellor had raised CGT rates for basic and higher rate taxpayers and introduced hikes for Business Asset Disposal Relief and Investors' Relief, aiming to boost Treasury revenue by up to £1.44 billion by 2025/26. However, experts argue the changes prompted behavioural shifts among taxpayers, leading to reduced tax revenues. Capital gains tax is levied on the profit from asset disposals, with only gains above the £3,000 annual exemption being taxed. Rachel Reeves’ tax changes were expected to raise funds and align CGT more closely with income tax but now face criticism due to the revenue shortfall. Speculation is growing about further reforms, including a potential wealth tax, though critics warn this could lead to further avoidance strategies or emigration among wealthier individuals, undermining revenue goals.
https://www.reuters.com/markets/europe/uk-investors-put-record-39-bln-equity-funds-november-survey-says-2024-12-04/ - UK investors invested a record 3.1 billion pounds ($3.92 billion) into British equity funds in November, marking a return after significant outflows in October due to a capital gains tax rise announced in the Labour government's first budget. The global funds network, Calastone, reported that this resurgence in investment aimed to minimise tax liabilities. Additionally, UK-focused funds saw the first inflows since May 2021, with 317 million pounds invested. Edward Glyn, head of global markets at Calastone, noted that nearly half of October's outflows were reinvested in the first week of November. However, he mentioned that there is no immediate major catalyst expected to drive a continued resurgence in the UK stock market.
https://moneyweek.com/investments/stocks-and-shares/city-bosses-call-for-stamp-duty-on-shares-to-be-scrapped-to-save-uk-stock-market - City leaders and investment platforms are urging the UK government to abolish the 0.5% stamp duty on shares to boost the struggling London Stock Exchange and attract more retail investors. Firms including IG, AJ Bell, Hargreaves Lansdown, Bestinvest, and Interactive Investor argue that the tax discourages investment in British companies and undermines market competitiveness, especially as international listings dwindle and firms like Wise and Flutter Entertainment shift to the U.S. Supporters, including Gina Miller and the CBI, emphasise the need for 'bold action' to address market shrinkage and revive investor interest. While Chancellor Rachel Reeves is expected to lower the cash ISA limit to redirect savings into equities, experts argue that scrapping stamp duty would have a more significant impact. Proposals also suggest removing stamp duty within ISAs and pensions, or at least on small- and mid-cap stocks. Critics assert the duty limits market liquidity, transparency, and domestic equity investment—which currently ranks lowest among major economies. Some, like IG, even propose eliminating cash ISAs and offering tax incentives for long-term shareholding in ISAs. The consensus among City professionals is clear: removing the stamp duty could reinvigorate the UK stock market and foster a stronger investment culture.
https://www.fool.co.uk/2021/09/15/will-the-dividend-tax-rise-cause-a-stock-market-crash/ - One concern is that once dividend tax increases, these firms could start to lose their ‘USP’ as investors switch strategies and look to stocks that offer growth potential instead. But given that the ‘Dividend Aristocrats’ are so focused on meeting investor expectations, I think that they could actually prove more resilient: the dividend tax rise might persuade investors to switch away from lower-yielding UK stocks instead. Another factor prompting my thoughts of a stock market crash are the low dividends paid out over the pandemic. 2020 saw two thirds of companies cut or cancel payments, leading to £14.5bn of lost dividends. Could the double trouble of these low payments and higher dividend taxes cause investors to lose faith in investment stocks? If so, we could see a period of mass sell-offs and even a stock market crash as a we approach the new financial year. But it is worth noting that dividend payments seem to have made a strong recovery so far this year, jumping by 61% compared the same period in 2020. The dividend tax increase could also have the unexpected impact of encouraging more buybacks, which act as an alternative way for firms to give back to investors. Under share buybacks, companies repurchase shares, which typically pushes up share prices and offers investors the opportunity to sell their shares at a premium. If the dividend tax increase encourages firms to offer buybacks as an alternative to dividends, the risk of investors running for the hills could be lower. Overall, I think the upcoming dividend tax rise looks unlikely to cause a stock market crash. The increase is relatively modest, and when the dividend tax-free allowance was cut by more than half in 2018, we didn’t see evidence of the market crashing. But I’m taking it as a sign that the government is looking for increasingly innovative ways to raise money, and that I need to look for increasingly innovative ways to invest!

Noah Fact Check Pro

The draft above was created using the information available at the time the story first emerged. We’ve since applied our fact-checking process to the final narrative, based on the criteria listed below. The results are intended to help you assess the credibility of the piece and highlight any areas that may warrant further investigation.

Freshness check

Score: 8

Notes: The narrative presents recent developments regarding Chancellor Rachel Reeves' proposed tax changes, including increases in dividend tax and capital gains tax (CGT), as well as potential reductions in tax-free pension lump sums. These proposals have been discussed in various reputable outlets, such as MoneyWeek and Reuters, in the past few months. For instance, MoneyWeek reported on the surge in pension tax-free cash withdrawals in September 2025 ([moneyweek.com](https://moneyweek.com/personal-finance/pensions/pension-tax-free-cash-withdrawals-surged?utm_source=openai)), and Reuters covered the Institute for Fiscal Studies' recommendations for tax reforms in October 2025 ([reuters.com](https://www.reuters.com/world/uk/uks-reeves-should-use-budget-reform-tax-system-ifs-says-2025-10-12/?utm_source=openai)). The earliest known publication date of similar content is from March 2025, when MoneyWeek discussed the potential £23 billion capital gains tax 'black hole' ([moneyweek.com](https://moneyweek.com/personal-finance/tax/capital-gains-tax-black-hole?utm_source=openai)). While the narrative includes updated data, such as the £4 billion estimate of market value loss, it largely recycles older material. This suggests a moderate freshness score. Additionally, the narrative includes a reference map with links to various sources, indicating a reliance on existing reports.

Quotes check

Score: 7

Notes: The narrative includes direct quotes from Michael Healy, UK managing director at IG, commenting on the tension between tax revenue objectives and investment culture. A search for the earliest known usage of this quote reveals that it appears in the MoneyWeek article from September 2025 ([moneyweek.com](https://moneyweek.com/personal-finance/pensions/pension-tax-free-cash-withdrawals-surged?utm_source=openai)). This suggests that the quote has been used in earlier material, indicating potential reuse. The wording of the quote matches exactly, with no variations found.

Source reliability

Score: 6

Notes: The narrative originates from the Daily Mail, a publication known for sensationalist reporting and a history of publishing recycled content. The inclusion of a reference map with links to various sources, including Reuters and MoneyWeek, suggests an attempt to bolster credibility. However, the reliance on a single outlet with a questionable reputation raises concerns about the overall reliability of the narrative.

Plausability check

Score: 7

Notes: The narrative discusses proposed tax changes by Chancellor Rachel Reeves, including increases in dividend tax and capital gains tax, as well as potential reductions in tax-free pension lump sums. These proposals have been covered by reputable outlets, such as MoneyWeek and Reuters, in the past few months. The inclusion of updated data, such as the £4 billion estimate of market value loss, adds specificity to the claims. However, the reliance on a single source with a questionable reputation and the recycling of older material raise concerns about the overall plausibility of the narrative.

Overall assessment

Verdict (FAIL, OPEN, PASS): FAIL

Confidence (LOW, MEDIUM, HIGH): MEDIUM

Summary: The narrative presents recycled content from previous reports, including direct quotes that have appeared in earlier material. The reliance on a single source with a questionable reputation and the recycling of older material raise concerns about the overall reliability and originality of the narrative. While the inclusion of updated data adds specificity, the overall assessment is a fail due to the issues identified.

UK economy
Taxation
Stock market