Government tax breaks for savings and investments have decreased by an average of 6% in the last decade, according to calculations published by Quilter.

The financial adviser and investment platform analysed eight UK tax allowances, of which six have either frozen or decreased. This included “vastly less generous pension allowances”, Quilter stated, as well as frozen inheritance tax (IHT) thresholds.

The pensions annual allowance – the limit on how much money can be built up tax-free in a pension in any one tax year while still benefiting from tax relief – has shrunk by 20%, while the equivalent lifetime allowance has dropped by 28%. Pension savers have also been hampered by a 60% reduction in the money purchase annual allowance.

The nil rate band for IHT, which is the threshold above which inheritance tax is payable, has remained frozen since 2009. Conversely, house prices have rocketed by 9.6% in just one year to January 2022, reaching an average of £274,000.

New projections from the Office of Budget Responsibility (OBR) revealed this “fiscal drag” effect, which is pulling more owners of modest homes into the IHT net, will eventually boost government coffers by £8.3bn by 2026/27 – a 63% increase in IHT revenues from 2019/20.

Meanwhile, the annual IHT gifting exemption has not altered in years, remaining at £3,000 since 1981, which if indexed would be £12,253 today. Quilter’s analysis also revealed that if indexed, the nil rate band would stand at £464,512 today, but instead remains frozen at £325,000 until 2026.

Quilter tax and financial planning expert, Shaun Moore, said that these tax allowances and thresholds are “great ways to incentivise people” to save for their future and distribute their wealth.

However, he warned: “Many of these have taken huge hits over the past decade and face a big freeze in the years to come.

“In the spring statement the Chancellor was clear with his intentions to balance the books to help pay for the pandemic response, so despite the reductions you could argue that these allowances and thresholds are not going to be as good for a long time to come.

“As such, it will be vital for individuals to utilise their tax allowances as much as they can this coming tax-year and take advantage of the situation today.”

Moore also highlighted that many of the government’s tax allowance have failed to keep up with inflation, which he warned continues to ratchet up each month, “effectively decreasing the allowances in real terms over time”.

“Putting cash to work in a pension could help to beat inflation through investment growth and tax relief, while gifting to a family member now could make a real difference to them against the backdrop of the cost-of-living crisis and may help to reduce your IHT liability,” he added.

“The new tax-year presents no better time to plan for efficient use of allowances for the tax-year ahead. If you are unsure about where to start, a financial adviser can help you identify how to make better use of the tax allowances available to you.”

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